Peter Thiel, Toyota, and Starting with Small Markets

How do you get a large share of a market? You start with a small market, take over that entire market, and over time you find ways to expand that market. It’s always a mistake to go after a giant market on day one. That’s typically evidence that you haven’t defined the categories correctly and it normally means there will be too much competition. Almost all the successful companies in Silicon Valley had some model of starting in small markets and expanding.

How to Start a Startup, Lecture 5, Peter Thiel

Whether launching a new product or feature, the likelihood of success is increased if you focus on a small market/bet. The goal is to quickly validate the idea, and then expand. Start small, be specific, and adapt as new information arises.

This is the fundamental idea presented by Eric Ries in “The Lean Startup“. What is the shortest path that I can take to validate (or invalidate) the idea for my product?

Toyota’s recent initiative to build “Arene”, an innovative operating system that would enable it’s fleet of cars to download upgrades wirelessly, is an illustration of the pitfall of starting with big, abstract visions.

As WSJ recently reported:

It was an immense vision, and difficult to pin to concrete car-launch schedules. The task of building software was also made more difficult because the company wanted it to work on many types of vehicles, including EVs as well as the hybrid, gasoline and hydrogen-powered cars Toyota remains committed to producing. Toyota said this week that EVs aren’t everything when it comes to reducing carbon emissions.

At the time, “What is Arene?” was the very question being debated by management at Woven Planet and Toyota. Development of the platform was taking longer than Toyota had expected. At one point, the goal was to put out a full-fledged version of the platform in 2025, but groups planning Toyota’s next-generation car lineup began to expect its delivery to be pushed back to 2027.

“Learning from failure, Toyota now has clearly defined what it needs to do—what it needs to prioritize—and it has a clear-cut product plan aimed at 2026,” said Takaki Nakanishi, an automotive-industry analyst and author of a recent book detailing the changes in Toyota’s EV and software strategies.

Peter Thiel sums up the strategy as follows:

Go after small markets, markets that are so small that people may not notice them or think they make sense. That’s where you get a foothold. And if those markets are able to expand, you can scale it into a big monopoly business.

How to Start a Startup, Lecture 5, Peter Thiel