Peter Thiel argues that startups should avoid targeting giant markets on day one and instead begin in very small, narrowly defined markets where they can dominate and then expand concentrically. He illustrates this with Amazon (books), eBay (pez dispensers → Beanie Babies), PayPal (power sellers ≈20,000 users, 25–30% penetration in 2–3 months, Dec 1999–Jan 2000), and Facebook (initial Harvard market ≈10,000 people, reaching ~60% share in 10 days), and contrasts these successes with clean tech firms (clean tech bubble c.2005–2008) that erred by aiming immediately at huge markets.
Questions this video answers
About 20,000 people.
About 25–30% market penetration in two to three months.
December 1999 – January 2000.
Initial market ≈10,000 people; it grew from 0 to about 60% market share in 10 days.
Approximately 2005 to 2008.
Chapters
The thing that's always a big mistake is going after a giant market on day one, because that's typically evidence that you somehow haven't defined the categories correctly. And it normally means that there's going to be too much competition in one way or another. And so I think almost all the successful companies in Silicon Valley had some model of starting with small markets and. And expanding. And if you take Amazon, you start with just a bookstore. We have all the books in the world, so it's a better bookstore than anybody else has in the world. When it starts in the 90s, it's online. There's things you can do, you can't do before, and then you gradually expand into all sorts of different forms of e commerce and other things beyond that. You know, ebay, you start with pez dispensers, you move on to Beanie Babies, and eventually it's all these different auctions for all these sorts of different goods. And what's very counterintuitive about many of these companies is they often start with markets that are so small that people don't think that they're valuable at all. When you get started, the PayPal version of this was we started with power sellers on ebay, which was about 20,000 people. When we first saw this happening In December of 99, January 2000, right after we launched, there was a sense that these were all. It was such a small market. It was terrible. We thought these were terrible customers to have. It's just people selling junk on the Internet. Why in the world do we want to be going after this market? But there was a way to get a product that was much better for everybody in that market. And we got to something like 25, 30% market penetration in two or three months. And you got some lock in, you got brand recognition, and you're able to build the business from there. So I always think these very small markets are quite underrated. The Facebook version of this I always give is that the initial market at Facebook was 10,000 people. At Harvard, it went from 0 to 60% market share in 10 days. That was a very auspicious start. The way this gets analyzed in business schools is always, that's ridiculous. It's such a small market, it can't have any value at all. And so I think the business school analysis of Facebook early on, or of PayPal early on, or of ebay early on is that the markets were perhaps so small as to have almost no value, and they would have had little value had they stayed small. But it turned out there were ways to then grow them concentrically and that's what made them so valuable. Now, I think the opposite version of this is always where you have super big markets. There's so many different things that went wrong with all the clean tech companies in the last decade. But. But one theme that ran through almost all of them was they all started with massive markets. Every clean tech PowerPoint presentation that one saw in the years 2005 to 2008, which was sort of the clean tech bubble in Silicon Valley, started with we're in the energy market. We're in a market that's measured in hundreds of billions or trillions of dollars. And then once you're sort of a minnow in a vast ocean, that's not a good place to be. That means that you have tons of competitors and you don't even know who all the competitors are. And so you want to be a one of a kind company where it's the only one in a small ecosystem. You don't want to be the fourth online pet food company. You don't want to be the 10th thin film solar panel company. You don't want to be the 100th restaurant in Palo Alto. Restaurant industry is a trillion dollar industry. So if you do a market size analysis, you can include. Restaurants are a fantastic business to go into. And it's often large markets. Large existing markets typically mean that you have tons of competition. Very, very hard to differentiate. So the first very counterintuitive idea is to go after small markets. Often markets that are so small people don't even notice them. They don't think they make sense. That's where you've got to put hold. And, and then if those markets are able to expand, you can scale into a big monopoly business.
