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Tobias Lütke, co-founder of Shopify, shared an interesting story about why some venture capitalists (VCs) passed on investing in his company. When these VCs were evaluating Shopify, they decided not to invest because they believed the addressable market for online stores was too small. They pointed out that there were only about 40,000 to 50,000 online stores at the time. Even if Shopify captured 50% of that market, it still wouldn't be a large enough business in their eyes.
Years later, Lütke met with the same VC partner who asked him what they missed. Lütke explained that the VCs had correctly identified the problem: the number of online stores was indeed small. However, what they didn't realize was that Shopify was a solution to this problem. The reason there were only 40,000 online stores was because creating an online store was hard, expensive, and complex. Shopify systematically tackled and simplified these challenges, making it easy for anyone to set up an online store.
This story underscores the importance of recognizing not just the size of a market, but the barriers that might be preventing that market from growing. Shopify's success came from addressing those barriers head-on, expanding the market itself by making it accessible to more people.
A similar insight comes from Reed Hastings, the co-founder of Netflix. Early in Netflix's history, many doubted the viability of a DVD-by-mail rental service. Blockbuster, the dominant player in the video rental industry, didn't see Netflix as a threat. Hastings once said, "Blockbuster could have killed us if they had launched a serious DVD-by-mail service. But they were too focused on their retail business." Blockbuster's failure to recognize the potential of an emerging market allowed Netflix to grow and eventually dominate the industry.
Another case study highlighting the importance of understanding market barriers is Uber. When Uber started, the market for ride-sharing was non-existent. Taxis dominated the urban transport sector, but hailing a cab was often inconvenient and frustrating. Uber identified this pain point and created a simple, tech-driven solution that expanded the market for urban transport by making ride-sharing easy and accessible. Today, Uber operates in hundreds of cities worldwide, transforming the way people think about transportation.
In conclusion, Tobias Lütke's experience with Shopify highlights a critical lesson for entrepreneurs and investors alike: the potential of a business often lies in its ability to solve problems that limit market growth. By removing the barriers to entry and simplifying complex processes, companies can unlock new opportunities and create expansive markets. This insight, echoed by the success stories of Netflix and Uber, demonstrates that innovation often comes from addressing the challenges that hold markets back.
Listen to Tobias: