n% of market

One thing that never ceases to amaze me is the sheer number of internet company ideas that I see even now in 2009. I do think this is a growing global market, particularly for mobile, but some of the valuations, based on P/E ratios for public companies, IPO valuations, and especially recent Series A VC funding for small companies, seem to contradict common sense. Having said that, I wouldn't have predicted that there would be 255 million mobile phones in a country that has a 12% poverty rate and a labor force of 155.2 million people (The United States, 2008). Ref and more facts  here. 

The United States comprises about 4.58% of the world's 6.7 billion people. So I think it's easy to imagine a world in which even if these companies only maintain market share that their consumer base will grow exponentially. But Warren Buffet would likely not agree with that type of thinking. As he points out in this MBA Talk, "I am not a macro guy."  I don't think the plan of getting n% of a $20 billion market works very well.  You have to offer something better or fill some niche in the market that your competitors can't.  It makes more sense to get every customer in a niche market that no one else can and to show how you can do it in your business plan.

So What Makes A Company Great? To Buffet, it's basically a good product and a 'moat' (protection from competitors). Buffet has a great quote near the end of this video: "We buy businesses we think we can understand. There's no one here that can't understand the Coca-Cola Company. I would say there's no one here that can understand some new Internet company. I said at the annual meeting this year that if I were teaching a class in business school, on the final exam, I would pass out the information on an internet company and ask each student to value it. And anybody that gave me an answer, I'd flunk them. I don't know how to do it! But people do it every day. It's more exciting. "

I think high-tech entrepreneurs, at some point, need to come to terms with how people and businesses spend their money. It doesn't matter how innovative or brilliant your idea is if it doesn't generate sufficient revenue from some source. And it doesn't matter how big the market is either. If you don't believe me, take a look at the airline industry. Airplanes were truly an amazing invention that I'm sure inspired some lofty business ideas. If you saw the potential of airplanes and successfully predicted how big the market would eventually be, say in the mid 1920s (about where we are with the commercialized Internet), I think you'd find it difficult to believe that the industry as a whole would lose money consistently.

Yet: "The airline industry as a whole has made a cumulative loss during its strenuous history, the costs include subsidies for aircraft development and airport construction. Because of increasing fuel prices and new industry standards the airlines have raised ticket prices as a compensation for the high cost of operating. Going hand-in-hand with these increasing prices, the effects of 9/11 have added more strain to the already existing problem of debt that the airline industry faces." source

So you just have to decide who you're going to sell to-- consumers, businesses, or the government-- and try to visualize how that revenue stream will come about.  n% of market doesn't work because the bigger the market, the more competitors.  It doesn't have to be clever or brilliant, it just has to be something people want-- to buy.

A lot of new internet companies seem to be focused on ad-stream revenue nowadays.  Can you visualize a market in which advertising is a multi-trillion dollar business in the United States anytime soon?  I can't.  But it would have to be to support the valuations of all the new businesses whose plan consists of getting tens of millions of users and charging companies for advertising. If it gets that big, just think how expensive the products they're selling will be.  Advertising needs to stay right where it is-- 1-2% of GDP.

Let's look at How Americans Spend Their Money

This pie chart isn't going to change that much in the foreseeable future, but  the small amount that it does change is important.  Health care costs have  been increasing lately, for instance.  Thinking of a way to reduce health care costs for companies in that business would be a popular idea (but EMRs probably aren't the way to go).  Creating a new brand of cigarette would probably be an unpopular idea. 

How Will The Government Spend The Stimulus Money?  This is a little dated, but you can see exactly where the money is being spent at Recovery.Gov

You can look here to see How Businesses Spend Their Moneybut it's pretty boring.  I think it's more useful to think about how you can save some specific businesses money and work out from there.