Startup lore is peppered with tales of unconventional ideas that founders were able to push past the naysayers, riding market forces that others didn’t even see coming straight to the top. When the underdogs start to lead the pack, the dismissals eventually turn into shorthands: “It’s the Airbnb for X” or “The Uber for Y.” Their origin stories get polished and their success makes industries seem as if they were always there.
That’s why Elad Gil loves to cite serial entrepreneur Mariam Naficy. The story of how she founded and built Minted hasn’t been rewritten as much since its start in 2007, and so it offers a more unvarnished look at forays into nonobvious markets. Naficy set out to build an online design marketplace focused on high-end paper goods, from wedding invitations to business cards. Even though her new venture in the centuries-old paper industry attracted some serious skepticism, she was sure there was an opening. She had observed how bloggers had cropped up from all corners of the internet to create great content, and she hoped to leverage the hidden, distributed talent pools in the field of design. Her platform would hold competitions where designers could enter and vote to select the designs she would sell, creating a community while building a retail model with a steady pulse on the freshest trends.
Looking through today’s filters, this combination of quality goods, an engaged community and crowdsourced analytics seems like a surefire win. But more than a decade ago, it was actually a contrarian move. It seemed too niche and almost old tech — print was a dying breed after all. And while the Kickstarters of the world have since demonstrated the power of the collaborative crowd, it wasn’t a proven model at the time. Consequently, many passed on the opportunity that Naficy eventually built into Minted, a business that’s now doing nine figures a year in revenue and is expanding into new verticals with everything from art and pillows to on-demand photography and a brick-and-mortar popup store.
For Gil, Minted’s founding story holds an important lesson for aspiring founders and investors alike: nonobvious markets can lead to hypergrowth, but they’re hard to spot in the moment. The trick lies in finding what bucks conventional wisdom before anyone else and scaling that unlikely idea into a high-growth company — something Gil is very familiar with.
In his roles as an operator and angel investor, Gil has watched, led or advised numerous companies as they’ve scaled dramatically on the heels of a nonobvious idea. He joined Google when it was around 1,500 people and left when it was over 15,000. After Twitter acquired his company, MixerLabs, he worked on product teams and eventually became VP of Corporate Strategy, helping to scale the business as it grew from 90 to 1,500 employees. He then started another company, Color Genomics and served as CEO before transitioning to life as an investor and advisor, working with companies such as Coinbase, Instacart and Stripe.
Relying on his experiences getting in on the ground floor of some of today’s biggest startups, Gil has distilled four principles to help potential founders, employees and investors uncover the nonobvious opportunities that others are overlooking. In this exclusive interview, he walks through each of these tools, explaining why he believes market trumps all and how to identify the three types of market structures worth pursuing.
Late-stage founders frequently turn to Gil for advice on the nuts and bolts of scaling for hypergrowth, looking to pick his brain on everything from managing the board to handling mergers and acquisitions. After fielding the same set of questions over and over, Gil felt compelled to write High Growth Handbook, in which he interviewed leading entrepreneurs and codified his own advice in order to create a toolkit for all of the post product/market fit companies seeking tested wisdom for building the plane mid-flight.
But those starting more than a few squares behind product/market fit face an entirely different set of considerations. Founders who are about to make the leap (or just have) are more concerned with finding the markets that can sustain and enable high-growth companies than best practices for finding and retaining independent board members. “There’s a huge difference between helping early versus late-stage startups,” says Gil. “For companies further along, there’s more people, chaos and surface area to cover, which is why I tried to go really broad in my book. But product/market fit is what matters most for early teams, and latching onto a promising, unique idea that has legs is something that nearly all budding founders struggle with.”
For those with the founder’s itch to scratch, starting a company hinges on identifying the right market to set your sights on. And it’s not an easy task. There’s significant pressure to pitch a novel idea with enough runway and appeal that it’s not a niche market, but in a space that’s not crowded. Everyone’s panning for the gold that is the nonobvious market, the counterintuitive chess move that others are overlooking — but how do you know when you’ve struck it?
Many fixate on the traits of the founders themselves, as though there’s some innate quality that enables them to unlock what others don’t see. But whether it’s angels looking to invest or aspiring entrepreneurs trying to settle on an idea to pursue, Gil argues that when it comes to evaluating opportunities it’s actually more important to assess the fundamental market structures.
And he’s learned this lesson the hard way. “I’ve misunderstood market structure myself of course. One of the biggest mistakes I made in that regard was passing on investing in Lyft’s Series C,” Gil says. “I was worried about the valuation and I thought that ride sharing was going to be a winner-take-all market, but of course in hindsight, many industries are more of an oligopoly and there was more space than I realized. I still kick myself sometimes over this,” he says. “As a general rule, when I make investments, it’s market first and the strength of the team second, which is quite different from a lot of other angel investors who are more founder-driven,” says Gil. “I think that’s a mistake. Even if you have a strong founding team that’s able to pivot, they’ll probably stay trapped in the market they’re already in. Many great teams get taken out by a terrible market. But if you’re in a great market, then the initial idea itself doesn’t matter as much — the area you’re operating in will have other great opportunities to go after. That’s why it’s critical for founders to figure out which market they are actually in.”
After interviewing some of the most entrepreneurial minds from Naficy and Reid Hoffman to Claire Hughes Johnson and Aaron Levie for High Growth Handbook, Gil has identified a set of common approaches that successful founders use to spot open opportunities, capturing what it is that helps them look at a market and come to a different conclusion than most.
Here are the tools that founders of breakout companies rely on to deconstruct the nonobvious and find the needle in the haystack:
Use first principles thinking.
Contrarianism is a common current running through Silicon Valley and while it may be popular, Gil doesn’t find it to be particularly productive.
“Definitionally, contrarianism means that a lot of smart people thought about something and they've come to a conclusion, and you're saying they're all wrong, which could very well be true. But more often, it’s a knee-jerk response where you’re just looking to say the opposite of what everyone else thinks,” he says. “What I’ve found to be more important is first principles thinking. It’s more constructive to ask ‘What is the real situation here? What are the fundamentals? What's really going on? Is this even a correct statement to begin with?’ And while these statements may lead you to question certain assumptions that others have laid out, it’s coming from a solid line of reasoning rather than the impulse to buck convention for the sake of it.”
Gil points to payments as an example of how this thinking could have been applied. “In the tech world, particularly after PayPal was sold to eBay, the dogma for many years was ‘Don't ever do payments, it's too hard and fraud will blow up and destroy you.’ And during the first internet wave, that was true. It was a challenge to get the type of data and information you needed to really deal with fraud at scale,” he says. “But fast forward to today and take a look at companies such as Stripe and Affirm. It seems that the fraud problems weren’t as bad as we thought and we’ve since developed systems, processes and data science tools that just didn’t exist back then. So if you’d applied first principles thinking five or 10 years ago, asking if those assumptions were still true and digging into whether it was still too hard, then maybe you would have come to a very different conclusion about starting a payments company and gotten ahead of the curve.”
Don’t just go off the latest thinking. Revisit fundamental assumptions and check the timestamp.
“Taking it even further back, people were really skeptical about ecommerce companies 15 years ago, questioning whether individuals would even be willing to put their credit cards into a website. Or for a more recent example, look at Slack. Everyone sort of assumed that enterprise chat was over after Yammer and Hipchat, but Slack came out with a simple and engaging tool with integrations,” says Gil. “To extrapolate a broader lesson, markets with potential usually have a changing dynamic that allows new players to climb in and make room for themselves. It could be falling costs, new tech or a new distribution channel. Whatever it is, if you’ve heard something was difficult, you can’t just stop there because things have probably changed.”
To level the playing field, anchor to real-world problems.
New entrants can clear paths in seemingly crowded, more established markets by drawing from —and going deep down the rabbit hole — on problems they’ve experienced firsthand. The most successful founders are able to see what others don’t by almost cloning themselves as a customer that can help refine the product.
“Stripe started because the founders themselves were working on other projects and realized that there were all these friction points in online payments, like the long wait to get accounts approved. Same with Gusto, where the founders had relatives who were entrepreneurs and found that existing payroll providers were just too hard to use. Or take Mailgun. The team kept rebuilding the same mail server and deliverability product for client after client, over and over again until they eventually launched it as a standalone because they saw the need firsthand,” says Gil. “In these cases, founders set out to build something better and have been incredibly successful at that, even though entering a market with well-established players wasn’t a play others would have made. But it all stemmed from spotting that problem.”
In Gil’s own founder days, this rang true for him as well. “The genesis of my company Color was sparked by my cofounder’s story. His mother had breast cancer twice, and he had other family members affected by the disease. So Color was really driven by how difficult and expensive it was to get genetic testing, and our idea was that getting that information more easily could really impact your life,” he says. “The key here is that it's a real problem that you've identified, and that could be because you've gone through the pain or because you have a hypothesis and you test it. Instead of just waiting for an idea to drop in your lap, start looking at the friction points in your own life or in the experiences of others.”
Crack tough markets by being product-centric vs. customer-centric.
While there’s a wealth of advice out there on the need to be customer obsessed, Gil has seen firsthand that an incredibly product-centric approach can be a more effective way to take on seemingly tough markets.
“Often a market will seem crowded, but then there'll be a few small product tweaks that will dramatically differentiate it. And if you can build something that’s compelling and really works, that can cause a large number of users to adopt you over an incumbent,” says Gil. “Sniff out the areas where there’s a growing customer base, but they’re being dramatically underserved or where specific segments of an otherwise mature market are being ignored.”
“There were dozens of other storage solutions, but Dropbox was able to sync files very simply across multiple devices in a non-painful way. They really simplified the problem and then just made sure that it worked,” says Gil. “Google is another example. At the time, all the search engines were trying to create all the content so that you would never leave. But Google's view was the opposite: let's direct visitors to other property and get them off of ours as fast as we can. So the metric was actually the minimum amount of time a searcher spent on a page, whereas everyone else was measuring how long they could keep them there.”
Gil cites Checkr and Zeplin as more recent examples of leveraging a product-centric approach to drive a wedge into crowded fields. “Zeplin a tool that allows designers and engineers to collaborate at the handoff. The CEO is a designer and the rest of the team is engineering. To start, they just iterated on the experience that they initially wanted, and then spent a lot of time with customers to build the product that the broader community would want.”
But when it comes to honing this differentiated product mindset by talking to customers, Gil notes that aspiring founders need to take it a step further. “If everyone just listened to their customers, they would essentially be regurgitating what’s already out there in the market instead of innovating on it. It reminds me of that Henry Ford quote about making a car instead of faster horses. It's less about asking your customer what they want and more about showing them and getting their reactions.” Another key caveat when using this tool is that there can be false signals in customer conversations in a positive direction as well. “A lot of founders will go to customers and say ‘Hey, would you want to use this?’ And customers will say ‘That's great, we'd love to use it.’ And so the founders go off and build it, but when then they come back with a product, no one’s using it. That’s because what they should have asked is, ‘Would you pay for this?’” Gil says. “Being interested is different than cutting a check, so part of going after something unconventional is relentlessly checking to make sure the appetite is there.”
Play on the fringe.
Gil has also points out that many big ideas skirt around the edges before they gain mass appeal. “A lot of the things that get big seem pretty weird at first, which relates to Chris Dixon’s idea that everything starts off looking like a toy. Innovation often comes from pockets of the population that are just willing to screw around with random stuff,” he says.
“Many trends start out in small communities and then eventually those embers catch on elsewhere. For example, the early days of the internet were very fringe, but the users were incredibly active. They had email and chat, doing all of these things that are very mainstream today in a rudimentary way. But it existed only in their very small communities, such as academic institutions, within the government or at computer clubs,” says Gil. “More modern examples include people self-hacking to create stripped down foods before Soylent hit the market or the folks pooling their money to buy a 3D printer and experiment together. The tipping point for when something moves from enthusiastic ambassadors to the broader population can be driven by different forces. The internet had strong centralized sponsors, from government, academic centers and then AOL. But for example, crypto was the exact opposite; you had an anonymous whitepaper drop out of the sky along with a code base and people just started mining Bitcoin.”
The future is here, it’s just not evenly distributed. Spotting nonobvious markets is about finding those pockets of innovation before everyone else.
To help potential founders, employees and angel investors find and mine nonobvious markets, Gil has bucketed the best types to go after, defining three archetypes: new technology, looks crowded but isn’t, and seemingly niche.
A classic nonobvious market involves technology that is so new or early that it’s unclear how it will develop, causing many to write it off as a shiny toy that’s going nowhere fast.
“In the late 1980s, AT&T hired McKinsey to do a study to assess how big the cellphone market would get in the next 10 years. With the limited reach of these expensive, big brick phones, the consultants estimated that the total market for mobile phones would be around 900,000 people, which clearly missed the mark a little,” says Gil. “They failed to extrapolate the curve properly, not realizing that prices would drop because technology would improve and all these costs would come down. From mobile to social to crypto, there’s so many examples where people failed to imagine what a couple years of compounding developments would look like, in terms of technology speed improving, costs dropping or adoption increasing. Analyzing those factors might totally transform your opinion on whether or not a new tech trend is going to work.”
For Gil, a fundamental lesson when it comes to uncertain new tech opportunities is that people chronically underestimate the rate at which technological progress occurs. “We should be monitoring what’s compounding at a fast rate, or alternatively, where adoption is growing reasonably rapidly. For example, if you see a product that went from one million to two million users in a year, you may discount it because of the low overall number. But if instead you say, ‘Oh my god, it's doubling every year,’ then you have an entirely different intuition about what to do,” he says. “The proof is in the growth rate or the extrapolated technology curve rather than the number sitting in front of you in that moment. You can also look at the technology and ask ‘Well, how much faster or better is this thing getting per year?’ and then look downstream. Or go the opposite way and ask ‘What happens if instead of a million people doing this thing, you had 50 million? What fundamentally changes in the market?’”
To source the latest and greatest in new tech, Gil recommends surveying your network. "What are the smartest people you know doing? Maybe it’s a hobby or something they're working on for their thesis. Or maybe all your coworkers are on a Slack channel about a particular topic, such as crypto or machine learning,” he says.
Looks crowded but isn’t.
Another type of nonobvious market that sticks out to Gil is the one that appears to be too competitive at first blush, but is revealed to be wide open after a second glance.
“A busy market isn’t a negative signal in and of itself. If it’s a good idea, there will be others with shovels digging for treasure right alongside you. And even if they got there first and their hole is deeper, that shouldn’t deter you,” he says. “If you do some poking around, you may find that it’s actually quite empty, whether that’s because no one has a great product or there’s lots of players with little differentiation. When it comes to crowded markets, you need to figure out if there are dominant players who will kill you or if there’s a real chance to be the first to deliver what customers actually want.”
You can still win even if someone else gets there first. Dig deeper to find differentiation and capture what they’re leaving on the table.
And there is no shortage of examples to learn from. “When Google started, there were already 10 other search engines out there. Or look at Dropbox and Box. I pulled up all the old articles from that era on cloud storage and there were literally a dozen other companies listed and they were mentioned as footnotes and treated as two people showing up late to the party,” says Gil. “The same is true for social. Why would you have funded Facebook with Myspace or Friendster out there? And more recently even, people thought social was game over in 2010 and failed to foresee the rise of Instagram, Snap and Chinese platforms.” As for a market with a current opening for entrants to come in, Gil cites custom ASICs in the machine learning semiconductors world as an example. “It looks crowded because of NVIDIA GPUs and Google’s recent advances with TPUs, but I think that the market is still wide open,” he says.
Given that many of the most interesting markets always look crowded, Gil has developed a series of questions to hunt for signals of open space:
Size up the competition. Are the competitors any good? Is it a great team than can crank out fast follows? How strong is their brand? “Many good ideas have bad implementations, so if you can come in strong and do it well you can win,” says Gil.
Look for structural disadvantages. Are there unfair distribution mechanisms or other barriers? “Some crowded markets are indeed crowded or not worth it. Selling niche software tools to big pharma is an example, because there is just a small number of customers. Edtech is another area where there’s a lot of movement lately, but I think it’s tough to gain traction. Although I love that it’s a high-impact area, no one’s willing to pay for it in the US and there are lots of structural issues,” says Gil. “Same with IoT. Large enterprises have a significant advantage because they can integrate and distribute, as opposed to a startup that makes a single ‘smart’ device, which doesn’t scale.”
Suss out if there’s room. Is it a winner-take-all or winner-take-most market? Or is it more of an oligopoly structure? “You need to measure how much room there is. People often think it’s ‘game over,’ which if you look at things like payments, isn’t always the case,” he says.
Calculate potential customers. Are customers actually being served well? What's the total penetration versus what it should be? How many people are actually utilizing the product and what is the true potential? “These questions can uncover that the incumbent product isn’t great,” says Gil. “Part of the reason Dropbox spread is because there was a real need there. If you think about it, the total population that should be using cloud storage solutions is close to all of the people who are online and using files. If you did the math before Dropbox came on the scene and looked at how many people were actually using a certain provider versus how many people should have been using cloud storage, you would have seen that the numbers were way off. It can be a quick back of the napkin calculation,” he says.
On a more tactical level, to chisel out a space in a competitive arena founders should think of broken tools that they’re forced to use anyways, while investors can look at the tools that their portfolio companies are using. And both groups can hunt for aspects of the company building process that always seem painful and could be helped by software. “Investing in things like Checkr and Gusto was a no-brainer for me because I saw other startups struggling with those very issues as potential customers," says Gil.
When determining how big a market can get, founders and investors often delude themselves — in both directions. For Gil, there are four types of seemingly niche markets that warrant a second look:
Too small: There are times when there’s an obvious use case, but everyone thinks the market simply isn’t big enough to pursue. “I’ve heard so many investors say ‘Yeah, there's real uses there, but it's too small to go anywhere,’” says Gil. “But ‘small’ can easily turn into a mainstream product. Many companies started in a small crevice and expanded upstream or downstream from there. And of course, a lot of founders didn’t realize that when they were starting. Facebook was invite-only for college students and is now focused on connecting the world. Uber probably didn’t think they'd be revamping all of transportation. I remember when they first got funded, a lot of the conversations were ‘They’ll only get 20% of the taxi market which is tiny.’ And in hindsight, Uber was actually solving a pretty dramatic user experience problem around transportation. It was really a replacement for cars for lots of people, not just taxis. But people pegged it as niche.”
Too boring: “There are some real opportunities in areas where investors or founders essentially don’t want to think about it or they just don’t understand it. Some things like payroll aren’t very exciting,” says Gil. “PagerDuty is also one of my favorite examples. For a while nobody wanted to fund them and then it suddenly became a very hot company. People initially thought it was a small market, but it's really something every company needs to build for its ops team. A signal for founders might be if you or your friends keep building the same internal tools over and over again. If it’s boring, just go do it, because that can become an advantage.”
Sometimes it’s not niche, it’s just boring. If you conflate the two, you’ll miss out on incredible opportunities.
Too high-end. “You also hear that certain ideas are super high-end and can’t possibly scale. But you have to see the bigger picture and think about where it could go,” says Gil. “How else could it be applied or who else could be served if costs came down with scale? Think of Tesla when it was just the Roadster or how Uber’s initial pitch deck was focused on black cars.”
Too personally unfamiliar. “As a founder, you should go with what you know, even though others may not get it — it'll be less crowded. For example, Katrina Lake turned Stitch Fix into a $4 billion company. Emily Weiss founding Glossier is another awesome example. Male entrepreneurs may not have thought of these markets and investors might have overlooked their potential, but Katrina and Emily knew there was white space,” says Gil. “Drawing on your own experiences or getting diverse perspectives is a key tool for figuring out if an opportunity is really niche or if it just appears that way and is a massive market instead.”
Regardless of what kind of niche market an idea is typecast as, Gil relies on one key learning. “As Vinod Khosla has observed, your market entry strategy is often different from your market disruption strategy. And too many people focus on how small the market entry side is, but the entry point almost definitionally has to be small, because you have to find a space that isn't covered or saturated by incumbents. If you find a gap and push your way through, often there’s a wider open space that you can pivot to later on,” he says.
Aside from missing the different kinds of nonobvious markets out there, founders and investors also struggle to pinpoint the right time that enables an unusual idea to take off. Startups can be too early or too late in a market, and there's examples in both directions.
“There’s always the argument that something is ‘ahead of its time.’ And certainly that can be true. I would currently put VR/AR companies in this category, and potentially parts of crypto (outside of the money or store of value use case) as well. I’m bullish on blockchain in the long-run, but there’s a lack of infrastructure and widespread adoption at the moment,” says Gil. “There may be a wave of companies that get it right in 10 to 15 years, but I wonder how much of the current crop will survive. It reminds me of the slew of companies that flamed out in the late 1990s but were reincarnated in some form later on. Look at Webvan and Instacart, Pets.com and Chewy, Kozmo and Postmates. There’s an old saying that you can tell who the pioneers are because they have all the arrows in their backs. But that’s not always true. Google, Paypal and Amazon all came out of that era as well and have had tremendous staying power because the market was ready for what they had and they executed on their ideas very well. Bitcoin may be a good example of something that will sustain from this era.”
For Gil, there are two patterns to look out for. “One type is when the first company should have won but messed up or had some other externality that screwed them over. Friendster should have been Facebook, but they didn't quite nail it. If you see someone who already took a first stab, don’t think you’re late to the game. Early entrants often get it wrong. Take a product-centric approach in order to pass up those who entered too early and fumbled,” he says. “The second instance is when the market conditions aren’t right. Whether it’s the need to wait for more infrastructure or for consumer habits to change, sometimes you're just truly too early. For early ecommerce, people needed to get comfortable shopping online. For pen computing, the hardware just wasn't there to create a great smartphone experience. You may have a great idea, but you have to be objective and see if the conditions are there to support it. Apply first principles thinking to see if you need to hit pause on your debut.”
While hindsight is 20/20, there’s always room for improvement in how entrepreneurs and investors go about uncovering, launching or backing the best startups. Begin by focusing on the market instead of the strength of the founding team or the initial idea. Instead of contrarianism, opt for first principles thinking that challenges what could be dated assumptions. Go after problems that you’ve experienced and take a product-centric approach to unseat more established competitors or deliver an entirely new solution. Explore fringe elements to spot pockets of the future before everyone else. When evaluating a specific opportunity, understand the market forces that can propel you past others, whether it’s new technology, unpacking a crowded space or building on a seemingly niche idea. Recognize that a market entry point will be different than a market disruption strategy and pay attention to market conditions and execution in order to avoid the timing mishaps of getting ahead of the curve or dealing with arrows in your back.
“Every once in a while, as an investor, you'll have a hunch that there's a big white space on the other side. When I funded PagerDuty, Stripe, Optimizely and Gusto, it was during an era where there was tons of room for SaaS products,” says Gil. And while it’s hard to pre-identify white spaces, he has a few hunches when looking ahead to speculate on what tomorrow’s nonobvious markets will be. “I think there's going to be 10 more Checkr-style companies. If you were to take apart a Fortune 500 company and ask what are the things that keep getting built manually or lack good APIs, I'm guessing there's a dozen other companies that mimic Checkr by taking a piece of what every enterprise has to do and turning it into software. I also think what I call ‘developer lite’ will be a huge area. Think of Airtable, Notion, Zapier, or other companies that are building out products that can be used by an engineer, but could also be used by people who are just more computer literate than your average person. But that’s just what I’m seeing. Your brain could make entirely different leaps with the very same tactics. The biggest piece of advice I have is to just grab a shovel and dig for what’s not obvious. And when you think you may have stumbled onto something, push past the skepticism and envision a world where that seemingly nutty idea can take off. Because if you don’t, others certainly will — and they’ll go build it without you.”
Image by yangleephoto / Multi-bits / Getty Images.