Chris Lengerich
September 12th, 2017

If you’re smart, had an infinite financial cushion and were absolutely mercenary in your choice of market, you could probably choose good markets consistently. [1] Practically, however, most people have to earn money on a day-to-day basis and don't have purely rational interests. How to choose markets in the real world?

Choose a market, not an idea

Because it takes months of expertise in a market to start generating good ideas, and even longer to turn ideas into opportunities that you can credibly execute, don’t stress about having a perfect product idea initially, and focus instead on choosing a broader market that will be changing by the time you’re an expert in it. Your market choice may not be perfect either, but on average, it’s likely to be ok.

Choose changing markets over interests

Unlike a specific idea, you should choose a market based on fundamentals, rather than your personal experience. If you choose a market with strong fundamentals, you’ll likely have developed a strong personal connection to it by the time that you’re an expert, since expertise breeds pride. But if you choose a market based on your interests at the moment, there’s no guarantee that it will start changing, which is one of the major drivers of opportunity.

Take an investment mindset

Most people have things they are already good at. Investing, however, requires starting from the basics again, which is humbling. As Ira Glass most famously noted, your taste for good execution will mature before your ability to execute.

Be strategically patient, but tactically impatient.

Start from experts

Some of the most effective people I know are the first to seek out experts when they encounter a new space. [2] They aggressively look for professors, other entrepreneurs and investors when choosing spaces, similar to Sam, Greg and Elon’s outreach to researchers prior to starting OpenAI. If you’re young, you may not have the career capital to get into meetings with well-known figures [3], but you can typically consume what they write online.

Experts tend to occupy leadership roles and have the time [4], network and experience to make good decisions and provide constraints that can limit your (exponentially large) problem space. Since they are incentivized to provide useful information to the public to grow their careers, their knowledge is also easily accessible - just make sure you stay aware of their biases.

Discount for bias

Experts will give you good information but be aware of their misalignment in incentives. The most common biases are portfolio incentive - a leader can make many bets - and proximity bias - people like things that are close to them. Sometimes these biases combine and you get pet projects. Upweight instead what early-career experts are doing personally - their incentives align well with yours.

Pick large and rapidly changing markets

Starting from experts you can get an idea of what markets might be interesting. Then, it’s time for due diligence - reduce the problem to first principles, run the simulation forwards and question whether the market will indeed be large [5] and changing rapidly [6] at the time that you’ve developed expertise in it.

Don’t be frightened by the anticipated competition - market movements typically leave enough vacuum that startups can fill it if they are nimble at sidestepping strong competitors and relentless in outperforming the weaker ones.

Some important features to consider in a market in 2017:

+ Driven by technical change

While startups can be driven by regulatory, cultural or technical change, there’s fewer people who truly understand technical change, and fewer technical leaders who can win the respect of teams that do, so it’s best to bias towards underlying technical change if you have advantages in that space.

Conversely, if you don’t have advantages, keep it simple. Segment and Spotify are not complicated ideas, but they work.

+ Quick to evaluate

Faster evaluation allows you to change directions more quickly, which is important since your expected value for a market is likely wrong. A new blood test takes a lot longer to understand and try than a new spin on taxicabs, for example.

+ Has a clear, compelling story

If it’s hard to captivate your own attention, it will be hard to recruit others or get investment, not matter how lucrative the dollar value of the opportunity is. Focus on markets which have clear, fantastic stories of change.

+ Already (kind of) works

Contrarian bets on market growth or technical breakthroughs are good for investors (who play iterated games), and bad for individual entrepreneurs (the likely outcome is that you fail and lose career momentum). As an entrepreneur building a career, you need to ship 70% of what you try, so bias towards the past is probably good. If something kind of worked in the past and conditions have changed, it might be worth exploring. However, it's rare that markets appear from nowhere.

Make a firm choice

Delaying a firm choice delays encountering unknown unknowns, and delays the next (possibly much better) investment. Time is precious, especially in your 20s, so make a firm choice quickly.

[1] A handful of investors actually do fit this profile, and are correspondingly successful.
[2] Outsourcing hard thinking to people even smarter than you is a good strategy in life that seldom is allowed in board games. It is taught implicitly, however, in PhD programs and startups.
[3] An easy way to magnify your access is to be a student, or become one temporarily for an interview.
[4] Simple time asymmetry in decision-making is a large reason why leaders seem far-sighted compared to labor. They’re paid to think about the market, while labor is paid to execute.
[5] The good thing about aiming for a large market is that if you miss the timing, you’ll still have a good job.
[6] Change is driven by technology, regulation or culture. The best way to predict a change is to make it yourself. The next best way is to be close to it.