Why “Small Markets” Can Be Misleading for Investors

Investors pass on deals all the time because of “small market size.” On paper, it feels rational—venture-scale returns require large markets.

But history shows that this logic can be flawed.

Take Shopify. When it started, the number of e-commerce stores didn’t look massive. Many investors likely assumed the market was limited. What they missed wasn’t the size of the existing market—but the one Shopify would create.

By making it dramatically easier for anyone to launch an online store, Shopify didn’t just serve a small existing group of merchants—it unlocked a new group of users who previously couldn’t build stores. This expanded the total number of users and ultimately turned a “small” market into a massive one.

So the real question becomes: how can VCs spot these hidden opportunities?

1) Is the product 10x better than the alternative?

A strong signal of future market expansion is when the product isn’t just incrementally better—but fundamentally better.

Before Shopify, launching an online store was expensive, complex, and required technical skills. Shopify compressed that entire process into a simple, self-serve platform that anyone could build an online store in hours. It removed friction—and in doing so, enabled a whole new segment of users who previously couldn’t participate.

Similarly, Uber didn’t just improve taxis—it removed the friction of finding one. No more standing on the street hoping for a ride. With a few taps, a car shows up. That shift didn’t just improve the experience; it changed behavior. People started using rides more frequently, in more situations.

The key question for investors:
Is this product so much better that it expands who can, or will, use it?

2) Is the startup starting narrow but capable of expanding?

Some of the biggest companies start with what looks like a niche.

Uber began as UberCab, focused on premium black cars. That market alone wasn’t huge. But the model was expandable. Once the infrastructure and behavior were in place, Uber moved into lower-cost options—and unlocked a much larger market.

This pattern shows up often:
Start narrow → prove value → expand into adjacent segments.

For investors, it’s not enough to see a niche—you need to assess whether it’s a beachhead or a dead end.

And just as important: does the founder actually intend to expand? Not every niche-focused founder does.

3) Are these founders worth backing for their ability to execute?

Sometimes, the bet isn’t on the market—it’s on the people.

Sequoia Capital’s investment in Airbnb is a classic example. Early on, the market didn’t seem large, but the strength of the founders stood out.

As Alfred Lin described, what stood out was their creativity and resilience—famously demonstrated when they sold themed cereal boxes during the 2008 election just to keep the company alive. That kind of scrappiness signaled something deeper: the ability to navigate uncertainty and create opportunities where none exist.

Great founders can reshape markets, pivot when needed, and expand beyond initial constraints. That’s rare—and often worth betting on.

Final Thought

Even with all of this, investors will still underestimate markets. It’s part of the game.

But instead of asking “How big is the market today?”, a better question is:

• Could this product expand the market?

• Could this starting point evolve into something much bigger?

• Are these founders worth backing, with conviction in their ability to build something exceptional?

Because sometimes, what looks small isn’t small at all—it’s just early.