Vision is about market not product

Investors want to fund companies that will be worth 10 billion dollars 10 years from now.

The most common question investors ask is “what is your vision for this company”.

Investors want to fund companies that will be worth 10 billion dollars 10 years from now. The catch is, the opportunity can’t be a $10B opportunity today, otherwise someone bigger will have noticed and will be already capturing it. So you need to pitch a vision of how the company will capture $10B in value in the future.

Ultimately, there are two options to pitch a startup vision.

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Paul Graham, in one his most famous essays “How to come up with startup ideas”, writes the following:

When a startup launches, there have to be at least some users who really need what they're making — not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, for the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist.

This is YC’s general advice. Find a problem that a small number of people have but experience very strongly. Solve the problem, find those people, and then tell them about it. From there, you follow their feedback until you reach product market fit.

It’s very experimental. You have a hypothesis that a small group of people have X problem and Y solution will fix it. You then test as fast as you can, analyze the data, and reset.

In a lot of ways, this is good advice for people bootstrapping a business. But when you talk with investors, you need big TAM slides, not niche markets. You need product vision, not experiments.

How do we reconcile this tension?

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Investors want to fund businesses that will be $10B outcomes 10 years from now. If you’re solving a niche problem for a niche market, how do you convince someone that it can be a $10B opportunity?

There are two options

1. Convince them that you can sell more products to the same market

2. Convince them that a bigger market will want the same product

As an engineer, my first inclination was to pitch more product. Once we build X, we can build Y and Z too. But I realized that this can come across as naive. It’s hard enough to get product market fit for X, now you have to do it for Y and Z too. And very likely there are already many other startups building Y and Z today, while you’re busy building X.

I needed a concrete example that could convince me that this is not the best way to pitch vision. Let’s say you start a tutoring school to teach kids math. You attract a few parents who really want to their kids to get better at math. Someone asks about your vision to grow this tutoring service. You could say, hey after we master math, we’re going to teach English, science, and history next. But there are some problems. First, most of your initial students came to you because their parents wanted them to learn math. They don’t care about English and science. They care about math. Second, all the tutors you’ve hired are good at teaching math. Now you need to hire tutors who know science and english.

The way most great companies evolve is via path two. For them, the market for their product was actually much bigger than they initially thought it would be. In the case of your tutoring school, instead of pitching the ability to teach more topics, you paint the picture for why every parent in 10 years will want their kids learning more math.

We can look at some more concrete examples. Doordash’s market was initially suburban residents in the Bay Area. Then it turned into anyone who wanted faster food delivery, including people in urban areas. Airbnb was initially for digital nomads who were okay spending a night in a stranger’s air mattress. Then it became anyone who wanted to book a hotel room. A non-tech example is Impossible Foods. They created a plant based meat alternative that would have seemed targeted towards a niche audience of vegetarians. Then it turned out that a lot of young millennials wanted to go vegan.

By the time it becomes obvious that there is a huge market, a solution will already exist or someone with lots of capital will start working on it. Which is why if you’re starting your company today, you can’t go for obvious markets. You have to start in the top of left of the graph above and shift right over time.

The advantage of doing this is that large mega-cap companies won’t compete with you right away because the opportunity will seem small to them. Your vision is the non-obvious bet that the small opportunity today will be a big one tomorrow - one that they can’t justify the risk to bet on.

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So we return back to our original question. We have an experiment with a niche audience, how do we convince an investor on a $10B outcome.

Well, we know that niche markets today can be huge markets tomorrow. We must show that we’ve observed a trend that is changing consumer behavior. Maybe not a lot of people want our product today, but because of this trend, many more people will want it tomorrow.

Investors will be skeptical. They’ll see your current state. You have to show them the arrow right. Then they can infer the future state.

This is the bet they have to make. Do they believe this trend that you’re describing is real? Is it big enough to push you all the way to a $10B valuation or will it fizzle? And will you be the one to capitalize on it?

With the right market observation, big visions can come from small experiments. Although, being right about them is a different challenge all together.