Altman wasn’t telling Chesky to lie; rather, he argued that if the Airbnb team truly believed in their own assumptions, $30 million was a gross underestimate, and they should use a number that was true to their convictions. As it turns out, Airbnb’s market was indeed closer to $30 billion.
When evaluating market size, it’s also critical to try to account for how lower costs and product improvements can expand markets by appealing to new customers, in addition to seizing market share from existing players. In 2014, Aswath Damodaran, a professor of finance at NYU’s Stern School of Business, estimated that Uber was probably worth roughly $6 billion, based on its ability to ultimately win 10 percent of the global taxi market of $100 billion, or $10 billion. According to Uber’s own projections, in 2016 the company processed over $26 billion in payments. It’s safe to say that the $10 billion market was a serious underestimate, as the ease of use and lower cost of Uber and its competitors expanded the market for transportation-as-a-service.
As Aaron Levie, the founder of the online file storage company Box noted in a tweet in 2014, “Sizing the market for a disruptor based on an incumbent’s market is like sizing a car industry off how many horses there were in 1910.”
The other factor that can lead to underestimating a market is neglecting to account for expanding into additional markets. Amazon began as Amazon Books, the “Earth’s Biggest Bookstore.” But Jeff Bezos always intended for bookselling to serve as a beachhead from which Amazon could expand outward to encompass his massive vision of “the everything store.” Today, Amazon dominates the bookselling industry, but thanks to relentless market expansion, book sales represent less than 7 percent of Amazon’s total sales.
The same effect can be seen in the financial results of Apple. In the first quarter of 2017, Apple generated $7.2 billion from the sale of personal computers, a category the company pioneered and once dominated. That’s a great number to be sure, but, over that same financial quarter, Apple’s total revenue was a whopping $78.4 billion, which meant that Apple’s original market accounted for less than 10 percent of its total sales.
My Greylock colleague Jerry Chen, who helped Diane Greene scale VMware’s virtualization software into a massive business, likes to point out, “Every billion-dollar business started as a ten-million-dollar business.”
But whether you are creating a new market, expanding an existing market, or relying on adjacent markets to get to those “B’s” that investors want (baby), you need to have a plausible path to get from here to there. This leads us to one of my favorite growth factors to discuss with entrepreneurs: distribution.
The second growth factor needed for a strong, scalable business is distribution. Many people in Silicon Valley like to focus on building products that are, in the famous words of the late Steve Jobs, “insanely great.” Great products are certainly a positive—we’ll discuss the lack of product quality as a growth limiter later on—but the cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.
Dropbox is a company with a great product, but it succeeded because of its great distribution. In an interview for Reid’s Masters of Scale podcast, founder and CEO Drew Houston said that he believes that too many start-ups overlook the importance of distribution:
Most of the orthodoxy in Silicon Valley is about building a good product. I think that’s because most companies in the Valley don’t survive beyond the building-the-product phase. You have to be good at building a product, then you have to be just as good at getting users, then you have to be just as good at building a business model. If you’re missing any of the links in the chain, the whole chain is broken.
The challenge of distribution has become even greater in the “mobile first” era. Unlike the Web, where search engine optimization and e-mail links were broadly applicable and successful distribution channels, mobile app stores offer little opportunity for serendipitous product discovery. When you go to Apple’s or Google’s app store, you’re searching for a specific product. Few people install apps just for the hell of it. As a result, the business model innovators who have succeeded (e.g., Instagram, WhatsApp, Snap) have had to find creative ways to get broad distribution for their product—without spending a lot of money. These distribution techniques fall into two general categories: leveraging existing networks and virality.
A) Leveraging Existing Networks
New companies rarely have the reach or resources to simply pour money into advertising campaigns. Instead, they have to find creative ways to tap into existing networks to distribute their products.
When I was at PayPal, one of the major vehicles for distribution of our payment service was settling purchases on eBay. At the time, eBay was already one of the largest players in e-commerce, and by the beginning of 2000 already had ten million registered users. We tapped into this user base by building software that made it extremely easy for eBay sellers to automatically add a “Pay with PayPal” button to all of their eBay listings. The amazing thing is that customers did so even though eBay had its own rival payments service, Billpoint! But sellers were required to add Billpoint manually to each of their listings; PayPal did it for them.
Many years later, Airbnb was able to perform a similar feat by leveraging the online classified service Craigslist. Based on a suggestion from Y Combinator’s Michael Seibel, Airbnb built a system that allowed and encouraged its hosts to cross-post their listings to the much-larger Craigslist. Hosts were told, “Reposting your listing from Airbnb to Craigslist increases your earnings by $500 a month on average,” and were allowed to do so by clicking a single button. This took serious technology skills—unlike many platforms, Craigslist doesn’t have an application programming interface (API) that allows other software to interact with it—but it was technology innovation for the purposes of distribution innovation, not product innovation. “It was a kind of a novel approach,” Airbnb founder Nathan Blecharczyk said of the integration. “No other site had that slick an integration. It was quite successful for us.”
Leveraging an existing network can have downsides, of course. What the existing network gives (or unknowingly allows to be taken), the existing network can also take away. Zynga, the leading social games company, achieved great success leveraging Facebook for distribution, but had to dramatically reengineer its distribution model after Facebook decided to stop allowing people playing Zynga games to post their progress to their Facebook friends. (Disclosure: I am a member of Zynga’s board of directors.) Zynga founder Mark Pincus was farsighted enough to build a strong enough franchise to survive the change.
In contrast, so-called content farms like Demand Media that leveraged Google’s search platform to generate website traffic and advertising revenues never recovered after Google tuned its algorithms to deprioritize content from what it called “junk” websites.
Despite these dangers, leveraging existing networks can be a critical part of a business model, especially if these networks can provide a “booster rocket” that is later supplemented with virality or network effects.
B) Virality
“Viral” distribution occurs when the users of a product bring more users, and those users bring additional users, and so on, much like an infectious virus spreads from host to host. Virality can either be organic—occurring during the course of normal usage of the product—or incentivized by some kind of reward.
After launching LinkedIn, the team and I devoted significant time and energy to figuring out how to improve organic virality; that is, how to make it easier for existing users to invite friends to use the service. One way we did this was to refine what have become some of the standard
