Big Enough, Small Enough
Founders can define their own criteria for how big and small an opportunity needs to be
This is the fourth in a series of in-depth essays that describe our process for creating new startup ideas at INVANTI and the thinking behind it. You can read the first one on finding contradictions here (+ listen to us talk through an example here), the second on unlocking better tradeoffs here, and the third on defining value here. Subscribe to this Substack to get notified about new essays and podcasts in this series.
Update: In the month of April ‘23, we are running a 4-week Problem Sprint, to help founders define and validate the problem they are working on, based on a the writing we’ve done here in the past two months. It’s open to anyone, free, virtual, and (mostly) asynchronous. You can sign up here.
In 2019, a filmmaker and friend in South Bend made a documentary about the city called Big Enough, Small Enough. It gathers a range of viewpoints on the city, its recent and more distant history, all in the context of then-Mayor Pete Buttigieg running for president. If you have any interest in what a city of 100,000 people in Northern Indiana actually looks like, you should give it a watch (INVANTI even makes a small cameo at the end).
The central theme that emerged and became the title of the film is that South Bend holds an interesting tension of being both big enough and small enough along several dimensions of life. And this tension seems to be a key component of the progress that has emerged here over the last 10-15 years. Some examples in the doc include:
“Big enough to have all the world’s problems, but small enough to know all the people working on them.”
“Big enough to have some of the nice city things (performing spaces, city parks, museums, restaurants), but small enough that people with some ambition can have an impact...”
“Big enough to have an audience for art and innovation, but small enough to get noticed when you create something.”
I think there is a lot to learn from this sentiment for founders when starting a new company. In the traditional tech startup world there is a constant question (usually from VCs) of “Is it big enough?” But rarely do people ask, “Is it small enough?” Both are actually important questions and founders should be asking them.
Enough for Whom?
When we say enough, for whom are we asking? Getting this answer right is half the battle in deciding if an opportunity is worth turning your life upside down and sideways to pursue. Too often, founders are asking the questions from someone else’s perspective. VCs, family, friends, co-workers, current and old bosses, mentors, advisors, accelerators, pitch competitions - the list can go on and on. Almost all of them have their opinion on these questions for your company. And in the race for resources, acceptance, and confidence, founders often forget to ask the questions from their own point of view.
Big Enough: Venture Capital Example
Of the other actors, VCs are probably the ones to learn the most from when it comes to building a criteria for what is big enough. VCs are famous for leaning in on the question of “Is it big enough?”. There is even a term for how they think about this - “VC math”. I think it’s useful to quickly review how VCs do this - not because it’s the right way, but because it gives us an analogy for how founders can create their own “founder math” around the opportunities they are excited about.
There are a lot of great resources out there that deep dive into how early-stage VCs evaluate the potential size of an opportunity (one of the most straightforward is Elizabeth Yin’s post on portfolio theory and construction). The TL;DR is that VCs do all of their math around fund size (both $ and # of companies). They model ownership, valuation, dilution, revenue multiples, and company attrition, all with view toward the question of “Does this company have the potential to be big enough to return a meaningful multiple of our fund? This is something most founders don’t understand - VCs are evaluated on fund returns, not company returns (although they are obviously related). History has shown that innovation and technology are power-law driven (think Pareto principle) endeavors. So a few companies will be responsible for most of the fund returns.
The rule of thumb that most VCs use is, “Does this company have the potential to return 1x the fund?” This is why you’ll also see the phrase “Your fund size is your strategy" when people talk about being an investor. A bigger fund implies you’re looking for bigger outcomes. We don’t need to go further here but the main idea is that investors have a way of thinking about the question of what’s big enough - and as we will talk about, this can be different from the way a founder might think about it.
An interesting tool founders can use to create their own version of this math is the reverse income statement (another resource here). This tool allows you to define what success needs to look like for you, and then work your way up the income statement to understand the revenue required to create that outcome. You can then judge if (1) the opportunity you’re evaluating can accommodate that size of a business and (2) if that’s the size of company you’re interested in building. This requires making a lot of assumptions, but it can be a really valuable tool for founders to understand what big enough means for them.
Small Enough: Side Hustle Example
I know quite a few people that would never take the leap of depending on starting a company to support themselves and their family. Some of them still have entrepreneurial instincts though and find a way to express those through side hustles. These are meant to stay side hustles - something that provides some extra income and allows them to do something they enjoy in addition to their full-time work. When sizing these kinds of businesses, often the question is, “Is this small enough to be able to run well at 10-15 hours per week? This could be a small store on Shopify, or as is common in the Midwest, doing landscaping in the summer and snow plowing in the winter. Whatever it is, it’s all about the efficiency of the endeavor - just enough skill and effort to make the service valuable to pursue, but not so much that it takes over your life.
What are we actually measuring?
It’s tempting to see this as a spectrum of ambition and skill. Those chasing VC are the ambitious founders. Those chasing side hustles are just enhancing their lifestyle. That’s not what is at hand here. Entrepreneurship is a tool, not a badge. Different forms of it are optimized for different uses. A big part of the founder journey is deciding (1) if it’s the tool for you, (2) what you want to use it for, and (3) what form of it is most appropriate.
I’d argue though it’s not about being big or small, it’s about being big enough on some dimensions and small enough on others.
Problem Size vs Market Size
The measure you’re probably assuming I’m referring to here is market size. This may sound nuanced, but I think it’s more important to frame this in terms of “Problem Size”. Problem size is simply the (value unlocked per customer) x (number of potential customers). This follows the same logic as thinking about value first, not price. Market size is just a summation of the product of price and number of potential customers. Problem size is a summation of the product of value unlocked and number of potential customers. Why does Problem Size matter more than Market Size? (If you’re not convinced by the below, others have written about this and probably present it more eloquently than me (e.g., here and here).
A market may not exist yet - This may mislead you into telling you that your market size is zero or very very small, when in reality the pain point could be there, just not solved yet as defined by the current, random McKinsey-generated categories of a “market”. If the problem is only being solved DIY or informally now, you’d never know how much value is there because it wouldn’t show up in many reports or current competitors.
Market size has baked in assumptions about Value - Market size is based on (# of potential customers) x (price) - it is inherently assuming a value unlocked by the price paid. But from our Stick to Value post, we know these things can change in relation to one another. So you may be underestimating the market because you can create more value or capture more of the value you create because of the current alternatives.
Market Sizes are like averages, Problem Sizes are like medians - Just like averages, Market Sizes are true, easy to calculate, can make you sound smart, but don’t really exist in the way the number suggests. In the same way that medians matter because they rely on the distribution of the underlying data, problem sizes matter because they are built up of actual customer pain points and the value associated with solving them.
Growing in Number and Intensity
In addition to size, we also want to measure if this a growing or a shrinking problem. Problem size is calculated by (potential number of customers) x (value unlocked per customer). So this number can be growing or shrinking along two dimensions - number of potential customers and/or intensity per customer (measured by value unlocked). We want to look at trends and decide if it’s growing on either or both dimensions. Note that sometimes it can be growing in one and shrinking in another - that doesn’t mean it’s a bust! For example, if some people are locked out of a network that is growing, and the negative outcome of being locked out grows with the number of other people getting access, it might still be a valuable problem to pursue. Internet access is the most obvious example that fits this dynamic - more people are getting access every day (the number of people with this problem is shrinking), but the affect on those without access also grows as everyone else gets access (the intensity is growing). This is the dark side of network affects. Looking carefully at these trends and the dimensions of number and intensity can help you gauge what the problem looks like on a go-forward basis.
What is Big Enough?
Is it big enough to…
…profitably run a business?
We need to make sure there are enough potential customers to be able to build a business, not just a product. The Stick to Value post talked about the economics on a unit level. We need to sell something for more than it costs us to create and deliver it, but we also need to sell enough to cover overhead/fixed expenses too.
…have an expected value to you larger than your opportunity costs?
After we account for the costs to operate the business, we need enough left over so that it’s worth it for you to pursue this versus something else. This can take the form of profits, dividends, equity, etc.
…contain your ambition for this business?
Finally, we need to make sure that this business can grow in a way that matches your ambition for that particular business at that point in time. Entrepreneurship can come at different times in life and you can want to use it for different purposes. This says nothing about your ambition as a person - it’s asking what’s your ambition for this business?
What is Small Enough?
Is it small enough…
…for you to get started?
A lot of ideas have died on the vine because the founders weren’t the right people to start it or did not have the right resources at the time to get started. No idea, no matter how big, is going to be worth anything if you cannot find a way to get started.
…to not have to bet the farm before you know if it’s working?
Entrepreneurship, no matter in what form, is uncertain and risky. Making smart wagers, especially if you have a family, is key. Finding paths to start that don’t make you go all in upfront is really important for a lot of people.
…to communicate with credibility?
A big part of being a founder is attracting resources, usually from strangers. These may be customers, teammates, suppliers, advisors, investors, etc. To start something new, people have to believe in you first.
A quick note on all of the above - as you can tell, these are all contextual. What’s available to some people to start a business is drastically different that others. What some can talk about credibly is different than others. What you can invest yourself without betting the farm is different than others. This is both a blessing and a curse. It means you can choose the business that works for you without having to judge yourself by others’ positions. It’s a curse in that as a society we are probably missing out on some founders who have the skillset and mindset for a certain type of venture, but don’t have access to resources that, if they did, would unlock a lot of potential.
It can also be difficult to match your big enough, small enough equation with that of the startup ecosystem you find yourself in. In South Bend, it’s often difficult for founders to find an opportunity that is big enough to contain their ambition, but small enough to gain credibility with the limited number of investors and angels. In the Bay Area, it may be the opposite - it may be difficult to find a problem that is big enough for VC investors, while small enough for the founder to feel like they can credibly communicate and start. In some ways, a lot of the innovation in funding (indie.vc, Calm Company Fund, revenue-based financing, etc.) is finding underserved big enough, small enough criteria and matching funding to them.
Calculating Problem Size & Defining Trends
The process of doing the work here is fairly straightforward - the hard part is the discernment of the criteria of what is big enough and small enough for you!
(If you’re interested in the workspaces we use in the Founder Studio to do the process outlined below, click here and we can send you a copy you can use.)
Create your Big Enough, Small Enough Criteria
For each of the questions that require it, try to define the right answers for you and your purpose of starting a business:
How big does this have to be to…
…profitably run a business?
…have an expected value to you larger than your opportunity costs?
…contain your ambition for this business?
How small does this have to be…
…for you to get started?
…to not have to bet the farm before you know if it’s working?
…to communicate with credibility?
Review your customer segment and value unlocked
Remind yourself of who you are serving and what value is unlocked when you solve the problem you’ve defined
Research the number of people that exist in your customer segment
Spend some time trying to find ballpark numbers on how many customers in your segment exist. It’s very unlikely that this is just a Google-able number, so try to piece information together. It’s important to note that an order of magnitude will suffice for now. Is it 100? 1,000? 100,000? 1,000,000? Also try to find any evidence on whether this number is growing, shrinking, or staying the same.
Research any movements in intensity
Also spend some time trying to see if the intensity of the problem is growing, i.e., is the value unlocked likely to be higher in the future. Again, order of magnitude can be a helpful guide for now.
Calculate Problem Size
Multiply the (# of potential customers) from Step 2 by the value unlocked per customer reviewed in Step 1 to calculate the Problem Size.
Summarize the Trends
Using the data you found, complete the Mad Lib:
Now is the time to pursue this because [insert trends in your favor here].
Evaluate your Big Enough, Small Enough Criteria
Is it big enough to…
…profitably run a business?
…have an expected value to you larger than your opportunity costs?
…contain your ambition for this business?
Is it small enough…
…for you to get started?
…to not have to bet the farm before you know if it’s working?
…to communicate with credibility?
Decide whether to move forward or not
Use your judgement (and gut feeling!) to decide if this is the right opportunity for you right now
Patterns of strong Big Enough, Small Enough
Because sizing the problem relies on knowing the underlying value, the clearer this number is, the easier it is to size confidently
It can be difficult to answer the question “Is it big enough to profitably run a business?” at this stage. If you can do back-of-the-napkin math and/or find analogies to other problems and businesses that show it may be possible, this question is easier to answer
What really matters here is the clarity of your criteria for what is big enough and small enough. The stronger and clearer those are, the easier it is to evaluate the opportunity
Patterns of weak Big Enough, Small Enough
This stage is a product of all the previous steps. If your customer segment isn’t well defined, you’ll have trouble researching how many potential customers exist. If the problem and current solutions aren’t well defined, and therefore value isn’t well defined, you’ll have trouble getting to a number for Problem Size. You’ll also struggle to understand the trends in number of potential customers and intensity of the problem. If you find yourself struggling on this step, it’s probably wise to go back and look at previous steps to understand where you’re still lacking specificity.
What’s next?
In the final post in this series, we will expand the conversation started in today’s post - how do you define if an opportunity is right for you.
If you’re interested in the workspaces we use to size opportunities in the Founder Studio, click here and we can send you a copy that you can use. Better yet, if you’re interested in working with us to do it together, apply for the Founder Studio here
Written in Lex
Works cited in this essay:
Big Enough, Small Enough, Ryan Blaske & Zach Schrank
Why VCs are obsessed with Unicorn companies? (HINT: let’s do the math together), Elizabeth Yin
Discovery-Driven Planning, Rita McGrath & Ian MacMillan
A Refresher on Discovery-Driven Planning, Amy Gallo
Why I Care About Problem Size More Than Market Size, Hunter Walk
Calculating TAM Is About Problem Size, Not Market Size, Luke Hutchison
Other works that influenced this essay:
Competition is for Losers, Peter Thiel