Many startup founders do not realize a key dynamic of the market they are in - the buying cycle.

As an investor, I calibrate to whether the majority of customers in a market 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. ✅

✅ 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.

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

The reason this matters is because each market type requires a different go-to-market approach.

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

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

A captive market tends to be relatively static. Customers are generally set in their ways. Generally, they are not actively entering into buying cycles. Furthermore, captive markets tend to have an established product standard for that problem set.

Thus, startups that enter captive markets may not have as many competitors initially.

In order to achieve a venture capital return, captive markets cannot stay as they are. They have to transform into growing markets. For a startup to grow rapidly, the customers need to be induced into buying cycles.

If a buying cycles in a captive market cannot be catalyzed, it’s a bad market.

Thus, there needs to be an external market force that serves as the catalyst.

✅ Whatever the external market force may be, in a captive market, the startup’s most common path to win involves a sequence of:

1) Educating the customer,

2) Catalyzing the buying cycle, and

3) Stealing customers away from alternative solutions. ✅

Inactive buying cycles need to be catalyzed. It gets catalyzed with education - either by educating the market on the new regulation and what it means for them, or the promise of a new technology, or how their workflow could be 10x better because of your product.

✅ 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. Growing markets tend to already have sharks in the proverbial water.

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.

Neither, because largely it depends on the startups approach to the market.

Often times, founders might hear investors say, “We invest in large and growing markets.” I hear that, but to me, I think that is too shortsighted.

For a startup entering a captive market, external factors such as regulation, technology are often more important. The startup often has the ability to define the category, because they have the potential to induce the market into buying cycles and be crowned the category king. However, there are many examples of when startups induce the buying cycles, and then another upstart startup overtakes them with a much different product and can leapfrog the success.

For a startup entering a growing market, there are likely other startups that look very similar that winning the market is more of a horse race. In my view, it’s less about the technology at that point, and more about the distribution or growth hack - the one that scales the fastest tends to have to largest opportunity set.

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

Here is an example of a captive market transforming into a growing market. Check out Tundra Angels’ portfolio companies, Huupe, with co-founders Paul Anton and Lyth Saeed.

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, it has called the world of basketball to attention.

Before Huupe, the market was content with Spalding or Goalrilla basketball hoops, and over the door basketball hoops.

18 months ago, Huupe released the Huupe Mini. All of a sudden, people who had a perfectly fine basketball on the back of their doors were now discontent. It catalyzed millions of people into buying cycles.

Recently, Huupe was featured on an interview on CNBC’c Closing Bell on the floor of the New York Stock Exchange, which you can see below.

Huupe and the Huupe Mini is a perfect example of a captive market transforming into a growing market. It calls the market to attention.

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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