[crikli]

So...to me this article illustrates the dramatic differences in objective and mentality between bootstrappers and VCs.

This VC looks at this idea, figures out that in order to own the market and make $fuckton, they'd have to spend > $fuckton. Decides to bail.

As a bootstrapper of businesses, I look at this case study and go "well yeah of course it'll take $fuckton because you're haven't focused on a narrow enough niche". Which of course they haven't because you can only make $shittons from niches, not $fucktons (where $fuckton is up to an order of magnitude larger than $shitton).

It's a very different set of expectations. $idea might not be investable as a VC, but if you can really define a specific niche, get a toehold, and patiently build from there, $idea might have merit for a bootstrapper.

(All that said I don't think this particular idea has legs based on the reasons identified in the "Regarding competition" section and also from my own limited experience in the music space).

[anstosa]

Ansel from PSL here.

Absolutely. Because we're venture-backed and are spinning out venture-backed companies, we are limited to billion dollar ideas. It's not uncommon for us to kill great ideas that could "only" make tens of millions of dollars.

We're hoping through blog posts like this and other means to be able to share more of them because we want those companies to exist, we're just not set up to create them!

[awb]

> we are limited to billion dollar ideas

How did matchmaking for music lessons get into the discussion as a billion dollar idea?

Referrals for tutoring in any subject (math, reading, music, etc.) would be a bigger market, but even then it might not be a $1B company.

[crikli]

Hey Ansel, thanks for responding and for validating my train of thought...I don't have that much exposure to the VC world so the things I suspect far outweigh the things I know. :)

[snowwrestler]

Have you found many billion-dollar ideas by following this ad-testing methodology?

[sprsimplestuff]

feel free to start sharing those "small market" ideas haha

[arminiusreturns]

Does this apply to the vast majority of VC's? So if I want to do a yc pitch it needs to be able to have unicorn level potential? Who would you target as investors for tens of millions ideas if so? I'm guessing a larger focus on angels and IB's after a more proven, traditional profit model is shown (often a much different model than VC-startup profit model).

[TheKarateKid]

I understand the logic, but I can't help but feel that this type of assessment is really shortsighted.

Would Facebook have passed this "test"? There was Myspace and Friendster dominating. How about Instagram? Why would anyone want to share photos elsewhere when everyone posted their lives on Facebook?

We all know how those stories ended.

Your firm's method only addresses the current market in current conditions. Having the foresight to see the currently unseen before anyone else is what yields amazing results. And if this is the main reason for killing something like this off... let's just say I'm glad I don't have my funds there. :)

[DevX101]

You're also ignoring the probability of success. This project is only worth $shitton ($30 million) if the project were perfectly executed and other market participants didn't dynamically react to this new entrant. This isn't the likely outcome.

The expected value of this project is probably only $5-10 million once you factor probability of success into account and thus not worth the time and effort at trying in the first place. A $5-10 million E.V. project is very much worthwhile for two founders who wanted to bootstrap though!

One reason VCs target billion dollar ideas is that you'll probably fail. But in the unlikely scenario that you succeed, it more than makes up for the 10-20 other projects in their portfolio that DID fail.

[thorwasdfasdf]

You won't even make 1 penny, if you can't break even on your user acquisition costs. That's what usually breaks a business not the fact that it's not profitable enough, but that's it not profitable at all.

[bcrosby95]

That said, if you want to specialize in $shitton projects you should be picking ones that don't need to be perfectly executed. There's a literal shitton of $shitton projects out there that you can half ass and still make a $shitton from. In my experience the best method at finding these $shitton projects is throwing shit on a wall and seeing what sticks.

[thelittleone]

Had a similar experience running a consulting practice for a global software company. Our practice revenue was growing with profitably around 20% EBIT. Software sales where not growing as fast. As a result consulting was an increasing % of regional contribution income but at a lower margin. So my practice was lowering regional EBIT margin. We got told to slow down. I put an amazing guy in charge and resigned.

Millions of incremental profit... unwanted. Of course it's logical given shareholders, but remains strange all the same.

[xenadu02]

There's a large opportunity cost to that strategy. If you allow consulting to make up 80% of revenue by default the business will inevitably turn into a consulting business, not a software business.

Consulting can be a great way to bootstrap but you need to know when the tail is at risk of wagging the dog.

[briandear]

Using that case study, getting $21k in revenue for $80k in expense makes zero sense ever. That doesn’t even count the actual startup cost to build the platform or even get the “talent” to deliver the lessons — which is an expense not to be ignored. So the real $80k is probably much higher because for a marketplace to exist, you have to attract buyers and sellers. And a 30% commission means that music teachers would have to sell at 30% more than they would for their own off-marketplace customers. And, unlike app sales, 1-1 music lessons don’t scale, so that 30% is a real hit because they can’t really make it up in volume: 1 hour can only yield, 1 hour of lesson for one person. I know this problem well: I founded a therapy marketplace that has been surviving for 10 years now, but it took 8 years to actually become profitable and still, just barely.

[dragontamer]

Real world music lessons scale better, with many beginner classes at Guitar Center (or private centers/homes) scaling to 5ish students per teacher.

It's not as high quality as 1 on 1 instruction, but the benefits of scale cannot be understated. Offer lessons at 1/3 price but make double the revenue.

[novok]

Often though, many successful VC startups start from a niche and expand from there. For ex: uber started with luxury black car service only in SF (a niche) and then expanded into normal cars, carpools, food and the rest of the world. I think the real requirement is a foreseeable future that you could potentially expand into a bigger $billion market.

Small niches that have proved themselves are often more attractive from an investment standpoint.

[Iv]

Totally makes sense for both sides really.

VCs look at this and are like "We can't do that with run-off-the-mill webdevs and marketers". And they have a formula to express what to expect from this reasonable effort model.

Comes a founder with awesome experience in pedagogy, a reputation in, say, Montessori teaching, and publishing records. She knows 10 musicians who could potentially teach, 100 potential students to bootstrap the idea.

VCs re-reun the numbers with these new assumption and discover a potentially ten times higher return after Q1.

VCs and bootstrapers and founders make different assumptions in efforts and time and need each other, fit different niches.

[orasis]

I’m a bootstrapper and I also use a similar metholodology to this article.

I only go niche if the larger addressable market is big enough. It might be okay if the initial niche offering only makes $5k its first year, but I should see some path to expand to $500k+ per year or the opportunity cost is too high.