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Many startup founders do not realize the market that they’re playing in.

As an investor, one of the things that I calibrate to is whether or not the majority of customers are actively entering buying cycles, or whether they are not. I call this difference a “captive market” versus a “growing market.”

✅ A captive market or a growing market highly influences the startup’s approach to acquiring customers and to winning. ✅ 

Two Types of Markets and One Major Focus

✅ A captive market is where customers are not readily entering buying cycles to find a solution.

A growing market is where customers are frequently entering buying cycles to find a solution. ✅ 

When I say, “market,” I’m referring to the general feeling in the market. I’m not concerned if sporadic customers are entering buying cycles. I’m looking at the palatable feeling and energy of a large cross-section of customers.

✅ My fundamental unit of analysis is the buying cycle. ✅

Contrasting Two Startup Examples

At one point, I spoke to a startup that was seeking funding that had a software play for, say, the insurance market. In this startup’s market, their customers were not often entering buying cycles. Because of that, the startup needs to go to the customers, educate them on why their product is different than what they are using, catalyze the buying cycle, and steal the customer away from the alternative. That’s a captive market. 

A different startup that I spoke to has a software play in, say, the retail industry. They receive have heavy organic inbound on their website, requesting demos of their product. - lots of customer are in buying cycles. That’s a growing market. 

Are Captive Markets or Growing Markets Better?

Tundra Angels has invested in startups that are in captive markets and startups that are in growing markets.

Yet, in order to achieve a venture capital return, captive markets often have to transform into growing markets. If we invest in a startup in a captive market, we are making the bet and having the conviction that this startup can enable the transformation to a growing market, or that there are other micro and macro-level variables that can enable that transformation, or both.

Many VCs choose to only invest in a growing market. They have no interest in a captive market because the time the education may require, etc. I think that’s too shortsighted of an approach. Some really nice opportunities exist in captive markets. Furthermore, the transformation to a growing market is exciting to watch.

✅ Knowing if you’re in a captive market or a growing market highly influences the startup’s approach to acquiring customers and to winning. ✅ 

The Path to Win is Different

✅ In a captive market, customers need to be educated.

In a growing market, customers need to be intercepted. ✅

Captive Markets

✅ In a captive market, the startup’s most common path to win involves 1) Educating the customer, 2) Catalyzing the buying cycle, and 3) Stealing customers away from alternative solutions. ✅ 

Inactive buying cycles need to be catalyzed. The startup needs to educate the customer on why the current solution they are using is inferior, and then the startup needs to steal the customer away from the alternative solution.

Captive markets tend to have an established standard for that problem set. 

In finance, the established standard is Bloomberg. In healthcare, the established standard is Epic. In private equity, it’s PitchBook. In venture capital, it tends to be PitchBook or CrunchBase. Captive markets, thus tend to require a startup's product with an exponentially different product that is a true 10x in value differential. This gives the customer enough escape velocity for the customer either cast off their existing solution or add it to their workflow.

Growing Markets

✅ In a growing market, the startup’s most common path to winning involves intercepting customers that are entering buying cycles. ✅

These customers don’t need to be educated. They are already convinced they need a solution for their problem. They just need to be intercepted.

Growing markets tend to not have an established standard for that problem set. The market is dynamic and growing, so there is no customer awareness of what the “established standard” should look and feel like.

But, often times growing markets attract other competitors quickly. 

That’s one of the trade-offs of captive markets vs. growing markets - you’re not the only startup doing the intercepting. You’re in the end zone waiting for a Hail Mary pass and there are other receivers or defenders’ hands clamoring for the football as well.

Because there is no established standard, the customer may compare to others in the space and tends to choose based on awareness, brand, and product features. The established standard inadvertently tends to be the one that can scale to the most customers, the fastest (hence the need for venture capital dollars). But the problem is, lots of startups end up looking the same. Just Google “Top CRMs in 2024” and you’ll see a host of all of these different products with very little core differentiation.

My Personal Example

In my FinTech startup, I was selling a software tool to help professional bond traders make better decisions. As I analyze the market…

We sold into asset managers, investment managers, and banks. None of those are coming online with any regularity. Bond trading general was actually on the decline due to technology efficiencies.

These customers were not actively entering buying cycles. Nearly every firm that traded bonds that was our ideal customer profile had a Bloomberg terminal. If they didn’t have Bloomberg, they had a akin-data source that gave them market insights on which bonds to trade.

Every firm that we would speak with would compare us to what was already on their computer desk - mostly Bloomberg. Trader would remark to us, “Bloomberg already has this feature, how does your tool compare?” Or, “I’m able to do this on Bloomberg, how are you different?” 

As we continued be to compared to Bloomberg, we soon discovered that our solution had to do something exponentially different than Bloomberg if we were to have a shot at moving forward in the sales process. Unfortunately, we weren’t able to pull off the “exponentially different” part.

Two Tundra Angels’ Portfolio Examples

Contrast my personal example with one of the Tundra Angels’ portfolio companies, Returns on Demand.

Returns on Demand has a B2B2C play for tuxedo rental space- RoD has infrastructure to deliver a tux to the groomsman ahead of the event and pick it up after the event. Their customers are formalwear stores. These customers were not actively in buying cycles for a solution like this, so it was a captive market.

However, Returns on Demand catalyzed buying cycles at scale, when none existed previously. Customers are running to Returns on Demand’s product with earnest.

That’s why Tundra Angels made an investment. With those market characteristics, it becomes largely a defense by scale play. Race to be the standard as quickly as possible.

In addition, in September 2021, Tundra Angels invested in a startup called Huupe. Huupe is the world’s first smart basketball hoop. With a screen as a backboard, cameras and AI to track shot trajectory, make/miss ratios, and location on the court, get NBA level trainers right from the Huupe, or play basketball with anyone in the world that has a Huupe. It’s called the world of basketball to attention. We invested alongside NBA All-Star, Thaddeus Young.

This was a growing market because buyers are frequently entering buying cycles for basketball hoops. So instead of hooping with a Spalding, you can hoop with Huupe! And many, many are.

Closing Thoughts

When startups focus on the buying cycle, it helps the startup attune their message to what the market actors really need.

✅ In a captive market, customers need to be educated.

In a growing market, customers need to be intercepted. ✅

So, what are the buying cycles telling you?

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