The received wisdom on startups is that you need a very large market – at least $1 billion – if you are going to build the size company VCs expect. But there’s another important factor to a large and growing market: volatility.
The article in The Wall Street Journal is a perfect example of this issue: Nvidia Lowers Guidance on Weakness in Gaming, Datacenter Businesses, subtitled Chip maker calls latest quarter ‘unusually turbulent,’ will take about $120 million in charges.
The Santa Clara, Calif., company’s stock sank to $138.01. The shares have fallen further than every other major technology company since an industry rout began in October—a skid that erased more than half of Nvidia’s market value.
Like Apple, Nvidia blamed the slowdown in the Chinese market for its sharply reduced revenue. But that’s not the only issue, a downturn in virtual-currency prices drove cryptomining enthusiastsfrom that market, leaving Nvidia with excess inventory.
And while the article doesn’t go into any detail, Nvidia’s products have been key components in gaming PCs and a weakness in that market has hurt Nvidia’s revenues.
And Nvidia had problems in yet another market:
Nvidia also said it didn’t close as many deals as it had expected in the last month of the quarter for its chips used in data centers.
That business had been a major draw for investors, Mr. Rasgon said, but given the limited number of large cloud-computing players, revenue from the business was “lumpy under the best of circumstances.”
So what will Nvidia do as three of its markets take major hits, tell investors there’s yet another market that will drive sales: “Nvidia said it remains well-positioned as a supplier for artificial-intelligence-driven and high-performance computing, which it said represents a large market.” But how credible is that projection given they failed to project the downturns in the Chinese, crypto-mining, gaming, and data center markets?
So what’s the lesson for founders here? Consider the stability and volatility of the markets you are targeting. Large markets are not sufficient, they need to be growing markets. And even large, growing markets are not sufficient, they should have low volatility as well.
This is far easier said than done of course; if large, mature companies like Apple and Nvidia can be hammered by unforecast downturns in their key markets how can startups avoid this problem? Well you are again forecasting the future, the best you can do is to study the history of your market and look at new factors – such as a megatrend like machine learning or the Chinese governments increasing control of its tech companies – and how they will effect your target market.
Globalization and the rapid rates of technological change are disrupting markets as never before, but as you present your market opportunity and revenue forecasts to investors make sure you include projected stability of your market – large size and rapid growth are no longer enough.