Here is an example. I recently talked to a founder who recognized that the early market for his product was about 1,000 professional users. He felt like the number of potential users in this market could grow by around 10x over the next 3 - 5 years. His plan was to build a product for the market as it is today and sell it to them for about $1,000 per year. He felt like he could get about 500 users within 18 months. Then as the market was growing 10x, he could add things to the offering that would allow him to charge around $10,000 per year. As the market tipped toward this new model he felt like it could grow again to about 60,000 total professionals.
So I told him that I have a simple framework for thinking about these things: founders should get a huge return for making ONE miracle happen. In his case, his first miracle would be getting 50% of a market to pay him $1,000 per year. Unfortunately in this case that isn't a huge businesses ($500k per year). For his plan to have a venture sized business required the following miracles:
- 50% market adoption at $1,000 / year price point
- 10x market growth (with no clear sign that market is growing at this rate today)
- Ability to increase pricing 10x to $10,000 per year
- Another 6x increase in market size (this is predicated on a downstream effect of his product)
So we need 4 miracles to get to a venture scale outcome. This is another reason why venture investors look at size of the market as critical. If the market is inherently small, you are signing up for a 2 miracles to occur... (1) you can build a product that the market will adopt and (2) the market will grow.
Unless your name is Elon Musk, you should only have to create "one miracle" to achieve success, or else the premise is just too risky.
