Market Evolution: The Special Case When a Startup Has No Market Risk

In this post Steve Blank urges startup founders to consider what kind of risk they face if they want to be successful. They must figure out if they face technology risk, market risk or both? But I believe the key principle to understand here is market evolution.

In order to understand market evolution I think it’s helpful to dive a bit deeper into the special case where a startup has technology risk but no market risk, admittedly this occurs very rarely for web startups and is more likely the case for a life sciences startup. But this is still relevant for web startups because often you can gain deeper insights into an issue by understanding why something doesn’t apply than why it does.

The first key idea is that in even in cases where there is only technology risk and no market risk, the market still evolved out of nonexistence. If you identify that there’s only technology risk and no market risk for the startup you’re working on, than that’s because the market has already formed and there’s a lot of pent up demand as a result of no one being able to satisfy the market.

Steve Blank has classified market types a startup can be in into 3 major buckets, New, Existing and Resegemented (as niche or low cost).

For the purpose of mapping the possibility space of markets I’d like to add two more market types to the list: at the beginning, Non existent; and at the end, saturated/commoditized.

While new companies can’t play in non existent or saturated markets these stages are important additions to mapping the lifecycle of a market.

So now let’s take the canonical example of something that has only technology risk: finding a cure for cancer. There is clearly no market risk because if you developed this cure now, the world would beat a path to your door.

But while there is no market risk for cancer now, that hasn’t always been true, and it won’t always be true. The market for cancer cures, just like any market will will evolve through all these stages: nonexistent, new, existing, resegmented and saturated.

When is the market for cancer drugs nonexistent you ask?

For most of human history, actually. Since life expectancy has been below 40 for most of human history people died too early for cancer to have any relevance.

And even after human life expectancy began to rise to where cancer was killing people, there was still market risk, because first we had to discover what cancer was AND EDUCATE the public about cancer, before it would be possible to sell any kind of cancer treatment, even if it was invented.

One of the key points Steve emphasizes about new markets is that in order to grow the market, the potential customers must be educated. You can’t reliably sell someone what they don’t yet want or understand.

But the main point I want to emphasisze is that all markets are highly dependent on timing. Markets don’t exist for most of the time and when they do there are small windows of opportunity. The only time there is no market risk is when there is clearly an existing market, evidenced by extreme demand, but there are no companies serving this market because nobody has found a solution. There is only technologically risk here, because all you have to do is make the technological breakthrough to win.

Update: What this means for other industries

All industries face market risk. There are just a few problems where the market has evolved and technology has not been able to meet it.

Web tech has evolved to the point to where most applications face only market risk and no technology risk. We will eventually develop the tools and infrastructure to where new advances in the life sciences and in biotech only face market risk. The early signs of this are in Craig Venter’s research which will eventually allow us to program life in the same way we program machines. An industry transitions from facing both technology and market risk, to facing predominantly only market risk when creators stop focusing most of their energy question, “Can we even build this?” and instead focus on the efforts on the question “If we build this, will anybody want it?”