If someone could build a teleportation device that worked, and that cost less than $2,000 to transport a person across the planet, they would be rich.
If someone were to build a bluetooth-controlled LED display that could be affixed to the back of a car and allow the driver to display messages from their phone, they might be rich.
What’s the difference between these two ideas? In the first case, we know there’s a market for rapid transportation of people. There’s evidence all around (cars, trains, airplanes). What’s lacking is the technology – it’s not clear if the technology can be made to work. In the second case we don’t know if there’s a market for communicating with the people behind you using your phone. The gap is the market (or as some say, product-market fit) – it’s not clear if customers will adopt the product.
If you were thinking of investing in companies pursuing these two ideas, and you were talking about the risks, you would say the first has technical risk, and the second has market risk.
To figure out which kind of risk your product is facing, ask yourself: If the technology was available to buy off-the-shelf, cheap, and any startup could build it, would it be obviously successful?
- High resolution mobile screen, with full web browsing capability (aka iPhone)? Yes: tech risk.
- Social network to share filtered photos (aka Instagram)? No: market risk
- Container that keeps vegetables fresh without losing any nutrients for a month? Yes: tech risk.
- Macaroni & Cheese Flavored Ice Cream? No: market risk
Interestingly, the rapid pace of technology has meant that more technology is available off-the-shelf (hardware and software), cheap and any startup can build it. A lot of the lower hanging fruit of products with technical risk have been created; and new opportunities are now in reach. These new opportunities are for things that aren’t just better, faster, cheaper. These are new opportunities to address unrealized needs; things you didn’t realize you would want or love. I would put things like Twitter, Instagram, AirBnB, Pinterest and Snapchat in this category. It wasn’t obvious that there was a market for these products. And while they definitely had technical risk too, the bigger risk was market risk.
In the real world new products face a combination of technical risk and market risk. But usually one dominates. And I believe that we have moved into a world with more market risk than technical risk. Take a look at the Unicorn List and ask yourself how many of these represent new technology that was risky, vs the application of technology into a new area with an uncertain market.
In part II I will show how this shift from technical risk to market risk explains the rise of Agile development and the Lean Startup movement.