Founders obsess over finding huge markets, but as one venture capitalist has experienced, size is a metric that doesn’t matter as much as they think.
I was having lunch with a friend of mine who is a long-time venture capitalist. Within a few minutes of sitting down, he started making fun of me for all the articles on entrepreneurship I write, asking me: “What does someone have to say over lunch with you to get their article published?”
I shrugged and said, “Tell me something that would serve as a good lesson about startups«.
“Like what?”asked.
«Anything useful»I replied. «For example, if you could give one piece of advice to entrepreneurs right now, what would it be?».
“Just some advice?”answered. “I could go on for hours”.
«Let’s start with one»I told.
He nodded and began to explain an unusual metric that he considers essential to help evaluate a startup’s customer acquisition potential.
According to my friend, most of the pitches he sees focus too much on describing the size of a market. «When entrepreneurs talk about the size of their markets, they are always trying to paint a kind of picture of how huge everything is»told me. “It always feels condescending because it’s almost like these founders have no idea who they’re talking to.”
“How can a market size slip be condescending?”I asked myself, “Especially if it’s showing a big market?”
“He’s condescending because he’s telling me something I obviously know.”he explained. “Remember, I spend half my life thinking about the size of potential market opportunities, so I likely know a lot more about the size of a given market than the entrepreneurs who are presenting it to me. So don’t try to trick me with junk data you found on the internet about how many billions of dollars your market is. I don’t want a poorly-informed lecture on the size of your startup’s market. I care about your chances of being able to capture a significant share of that market early in your startup’s life.”
“And how are entrepreneurs supposed to explain that?”I asked for. “I mean, apart from having a lot of clients at the beginning. Or is having a lot of clients at the beginning the only way to get investment?
“Obviously, having a lot of clients from the start is great”answered. “But there are other ways to explain early customer acquisition.”
«There is an indicator that I like to use and I call it Early Customer Accessibility»continues the VC. «ECA for short. It’s not a formal metric. It’s more my informal way of understanding how easy it will be for entrepreneurs to access their first batch of target customers in a given market.».
“And what exactly is involved in the accessibility of the first customers?”asked.
My venture capital colleague responded with a long and somewhat convoluted explanation of his ECA concept. Rather than repeat it here word for word, I will summarize it below.
According to my friend, early customer accessibility is all about three things:
- To what extent do existing operators dominate the market, especially in terms of brand value?
- What is the cost of change in the sector?
- How often do consumers in the sector look for new options to solve the same problem?
To explain these concepts, the investor shared an example about podcasts that I found familiar, so I’ll use it here as well.
According to the investor, podcasts are a good example of a huge market with terrible initial accessibility for customers.
He explained that at first glance, podcasts seem like a huge market, with over 500 million listeners. So, if you look at the market size alone, you’d assume that podcasting represents a huge opportunity (not necessarily a venture capital-style money-making opportunity, but a huge media opportunity for someone who likes to create content).
However, despite the huge size of the global podcast audience, creating a new one is a bad idea because it has extremely poor ECA factors.
First, the most successful ones are generally quite well-known and are often hosted by celebrities or well-known personalities. As a result, they often have extremely dominant brand equity, making it difficult for new podcasts to break through. That’s the first knock on the ECA indicator.
Second, while it may seem easy to try a new podcast, the cost of switching is actually much higher than it appears, due to the amount of mental/emotional commitment people put into the podcasts they already listen to, as well as the relatively long time it takes to listen to a new podcast. High switching costs are the second knock on ACE.
The third problem with podcasting is the relative rarity of finding new podcasts. Simply put, once people have a podcast rotation they are comfortable with, they don’t tend to change it quickly. This is the third blow of the ECA: consumers don’t regularly seek out new options in the market, so it will be difficult to attract new users.
All of the above issues related to ECA make launching a new podcast a bad opportunity despite the huge market of podcast listeners that exists in the world.
Apply the same concepts to any new business you’re building and you’ll see the value of my colleague’s ECA concept.
Will your new company have to compete with other established companies? If so, that’s a big problem.
Will consumers of your new company’s product have a hard time abandoning what they’re currently doing? If so, that’s another big issue.
Finally, how often do consumers in your market switch to alternative products? If they don’t switch products often, then you’ll be struggling to attract a consumer base in a market with a lot of inertia.
As you can see, ECA is basically a framework for evaluating a startup opportunity that encourages entrepreneurs to stop thinking: «How big is my market?»and focus instead on: “How easy will it be to build momentum by getting early customers?”
It is certainly not a scientific indicator, but it is one of the most important indicators of a young startup’s potential. After all, even in a huge market, if a startup is going to have difficulty finding its first customers, it has very little chance of success.
