Wedge is the Founder's Edge

October 20, 2023

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Written by: @long_solitude

Or why you should never aim to capture 1% of the $1 trillion market

There are few things a founder can do that inflict more self-harm than showing a slide with an infinite TAM potential. Anyone who claims their TAM is “everyone on the internet” or “every smartphone user” signals that they don’t understand their target market in detail.

Every market is a composition of more granular markets; if you’re an early-stage startup, it’s most likely you could explain a niche segment your product serves on day one. That’s why we say that building a product that appeals to everyone means it will appeal to no one.

Every successful product at the time of its launch must have been either a novel idea, or had a unique method of executing an already tested idea; accordingly, it must have been ignored by most users at the start.

Capturing a 1% share of a $1 trillion market (while having none today) is an alluring $10B aspiration, but without a unique value proposition to a subsegment of this mega-market, it sounds like boarding a flight that has already taken off. You have to find a smaller aircraft (or a jet-pack) – your own wedge.

Wanted by Zee Prime: A founder flying a jet-pack product wedge

Blockchain had a wedge

Crypto, or blockchain, as we know it today in the mainstream, started with Bitcoin's whitepaper. It was a protest against the prevailing banking and monetary system. The proposed P2P payments system without centralized intermediaries was an elegant solution to solve a very specific problem.

Bitcoin has validated its original purpose for payments, but the underlying blockchain technology has inspired a much broader set of ideas later. If Bitcoin’s original whitepaper had proposed to also launch financial primitives, social networks, games, and art on blockchain, it would have gone nowhere. The idea of blockchain alone invites doubt; using blockchain to solve every problem imaginable raises the bar for execution impossibly high.

If you looked at on-chain applications that have made it big and survived to this day, you’d see that they started by solving a very narrow problem (or something that didn’t even look like a problem) that mattered to a small group of users. Very few people can pinpoint the problem they’re having and at the same time name a specific solution to it (if it was the other way around, these problems would have been solved already).

The mystery, of course, is that it’s impossible to reason why or how this problem will go from being relevant for few to being relevant for many. In some cases, great products designate problems for consumers to solve. You cannot imagine driving around in an automobile until you see one (your problem then becomes acquiring one), nor was it possible to imagine flawlessly using a full touch screen phone before being handed one.

That’s why building ventures (and investing in them) is so non-prescriptive, and often inspired by science-fiction. It’s the founder’s intuition that helps navigate and bet on a particular outcome; when such intuition is lacking, people resort to solving abstract problems for large groups of people with very few common denominators among them.

Uniswap handles close to a billion dollars of volume every day, and people legitimately take it as a competitor to centralized exchanges. But it’s actually an inferior product for trading, and it wouldn’t have succeeded if its proposition was “trading, but on-chain”.

The wedge of Uniswap V1 was allowing permissionless bootstrapping of liquidity (and trading) for long-tail of tokens, something that market makers and centralized exchanges could not offer, but was needed for founders in the industry. Even the term “bootstrapping liquidity” is now primarily associated with Uniswap, the same way as “google” is synonymous with search.

Once this “narrow” problem was solved and the on-chain usage pattern was established, Uniswap could capture adjacent markets that normally would trade on centralized exchanges (like ETH), and reinforce the success by minimizing the deficiencies of an AMM (e.g. by providing concentrated liquidity).

It’s not about building a perfect product for everyone. It’s about solving someone’s problem (or designating one, as discussed earlier) and then using that momentum to expand into adjacent areas while iterating the product. We are now at a point where Uniswap did more volumes in 2023 than Coinbase:

While Blur vs. Opensea is not very topical these days, we think Blur did well in identifying two insights that led to its wedge in the market primarily dominated by Opensea:

  • The NFT investor market is not uniform. There is a clear distinction between collectors (passive holders who accept illiquidity and fees) and traders (active participants who seek higher liquidity and lower fees). Opensea catered to the needs of the former at the expense of the latter – there was an inherent conflict between the two;
  • The incumbent didn’t leverage a token, which in itself is a way more crypto-native product than anything else.

If Opensea’s target user was the artist and a collector, then the volume transacted is probably not the perfect or the only metric to measure the marketplace’s success; on the contrary, if Blur’s target user is the trader, then the volume transacted is much more critical as it’s dependent on available liquidity. And that’s exactly what Blur achieved by rewarding market-making (providing bids and asks) with a token.

While there was criticism that Blur primarily serves a small minority of power users – the 500 whales – it’s not a bad thing if these whales are the tastemakers. In fact, building for the small number of people who care actually allows a) validating product ideas and shipping them quickly; b) achieving superior marketing outcomes.

Because Blur already had the deepest market liquidity, it allowed the launch of an adjacent but highly related product – Blur Lend, or Blend – which is the lending market that uses NFTs as collateral.

Small markets discover large markets

The examples above show how successful companies create their own monopolistic markets. They escape competition by pushing through their wedge. Uniswap doesn’t compete with Binance on the same axis; Blur doesn’t compete with Opensea for the same users; blockchains don’t compete with “internet” or tradfi institutions – blockchains are a thing of their own, with unique properties.

Paraphrasing Thielism through Blake Masters who illustrates this point more broadly:

“The usual narrative is that capitalism and perfect competition are synonyms. No one is a monopoly. Firms compete and profits are competed away. But that’s a curious narrative. A better one frames capitalism and perfect competition as opposites; capitalism is about the accumulation of capital, whereas the world of perfect competition is one in which you can’t make any money.”

Paradoxically, in perfect competition companies start very wide, but immediately narrow down their market in pursuit of differentiation (even if narrowing down doesn’t feel like what they’re doing). But if they don’t participate in perfectly competitive markets, and start in their own (small) markets, they can only grow, not shrink.

“The best kind of business is thus one where you can tell a compelling story about the future. The stories will all be different, but they take the same form: find a small target market, become the best in the world at serving it, take over immediately adjacent markets, widen the aperture of what you’re doing, and capture more and more."

Reverse wedges are plentiful in perfectly competitive markets

When observing the mega markets, more often than not people look at the mid or late stages of the cycle, where momentum carries growth by itself, and success is obvious. But success is obvious only after the fact, and people fail to appreciate the secret insight required to start a small product or service that leads to markets worth hundreds of billions of dollars.

Consider that Newton has laid the foundations of classical mechanics. This branch of physics, which deals with the motion of objects and the forces acting upon them, is fundamental to all fields of engineering. But being an accomplished engineer requires much more than understanding classical mechanics – it requires possession of knowledge secret to the conventional, well-understood field of mechanics.

That’s why every successful founder who escapes competition understands competition; yet, it doesn’t require obsessive knowledge, for it’s simply not where their edge is. Businesses understand competition, just like engineers implicitly understand Newton’s laws of motion.

Intuitively, we think every major brand of today started with a narrow wedge:

  • Facebook started as a platform exclusively for Harvard students, before opening to other universities, high schools, and then the general public;
  • LinkedIn’s go-to-market relied mainly on employees in the tech sector, which allowed it to break the cold start problem (it didn’t hurt that tech became trendy either);
  • Nvidia’s hardware was serving the gaming industry before it was extended to training models in the data centers, and the CUDA software computing platform was built to facilitate it;
  • Google’s unique insight was the Pagerank algorithm that produced better quality search results compared to other engines. This ultimately led not only to the most lucrative ad business, but also the Google Cloud, hardware businesses, and other things;
  • Porsche started as a sports car company, but by now it mostly sells SUVs. Production of sporty 911 and Boxster models has not grown by a lot since the late 1990s.

All of these businesses eventually expanded and captured adjacent markets, which had seemed out of reach on day one (ads, hardware, cloud, etc). But no company illustrates the power of the wedge better than Amazon.

Out of all available product categories to sell Amazon picked books, which is a perfect category for building an online retailer with over 3 million units of product, while selection in physical stores was limited to under a hundred thousand. In other words, this would be a great category to prove the hypothesis that retail shopping will move from physical stores to online. Amazon sourced inventory from several book distributors to fulfill the orders.

The existing customer traffic has been levered to launch other product categories and introduce listings from 3rd party sellers to broaden the supply even further. This is Amazon Marketplace as we know it today but it originated from a single category (books) and a transactional model that was way less scalable (dropshipping).

The volumes Amazon handled required them to build in-house logistics operations – distribution, fulfillment centers – which eventually was perfected so much that it became the premier shipping company offering logistics-as-a-service to 3rd party companies outside of Amazon Marketplace. Amazon’s shipping created a value proposition to retail consumers that’s in most cases superior to incumbents UPS and DHL. While many logistics startups want legacy shippers to be disrupted, most of them fail because they never get any volumes to ship. Well, Amazon brought their own volumes.

As Amazon’s e-commerce operations grew in magnitude and complexity, internal teams required a set of common infrastructure services and hardened APIs that everyone could access. Hypergrowth of Amazon pushed the engineering team to solidify its infrastructure.

There seems to have been several Amazon teams working on AWS idea in parallel. This is what Ben Black, the co-author of the idea behind Elastic Compute Cloud (the first product of AWS) wrote:

“Chris [the manager] was always pushing me to change the infrastructure, especially driving better abstraction and uniformity, essential for efficiently scaling. He wanted an all IP network instead of the mess of VLANs Amazon had at the time, so we designed it, built it, and worked with developers so their applications would work with it. [...]

Chris and I wrote a short paper describing a vision for Amazon infrastructure that was completely standardized, completely automated, and relied extensively on web services for things like storage. [...] Near the end of it, we mentioned the possibility of selling virtual servers as a service.”

What started as an internal project ultimately led to the launch of AWS, and an entirely new market – the cloud. In 2022, annual spending on cloud services reached half a trillion dollars. But when AWS launched in 2006, people at Amazon couldn’t have enough appreciation for the potency behind their idea; it was a market of their own with so many unknowns that it was not worth quantifying.

Wedge, economics, and volatility

While renewables, and renewables investing have been trendy since the 2000s, it has always relied on their wedge being the government’s subsidy through tax credits. The climate-change proponents would claim that the wedge was the environmental cause, but try arguing that to someone who struggles to pay their energy bills. For the longest time, the renewables were uneconomic on their own (and even with subsidies):

Accordingly, returns on capital invested were atrocious in the early parts of the cycle (especially in solar, which always had worse economics on the dollar compared to wind), with the majority of renewable developers and suppliers of that era going bankrupt, or underperforming in the public markets.

There were no secrets to renewables in the 2000s – the power of wind and solar has been understood and used for thousands of years (vertical-axis windmills and concentration of sunlight). The industry was carried through on the government's initiative and budget that incentivized further development of panels and turbines by the private sector, to the point where unsubsidized renewables are now competitive under certain circumstances.

The point we want to make is that cheap and empty blockchains are a bit similar to uneconomic and subsidized renewables. Just like renewables had no clear wedge aside from subsidies and hopes that eventually the costs will drop, most of the blockchain infrastructure under research and development today relies on the same premise – heavy venture funding and projection of declining transaction costs. But what if there was an external push from consumer to accelerate the development timeline?

Blockchains have been cheap enough for long enough for the product wedge to show (and it had shown in the past more than once). If you’re a founder thinking your crypto product will get adoption once transactions on rollups cost $0.01 instead of $0.10, you’re probably looking in the wrong direction. There are apps on Solana and NEAR that reach hundreds of thousands or millions of users regardless of what Ethereum rollups do.

Crypto has two directions: one for censorship-resistant and private money / payments (which has had success, but is hard to scale); another for global online wealth creation through technology. Crypto has a mega wedge in the latter – it’s the volatility and easily available liquidity to every new asset (unlike in the real world). It rides the same wave that penny stocks, tech stocks, poker, sports betting, and other forms of speculation have led earlier.

Within crypto, we’ve had ICOs, NFTs, ERC-20 tokens, LBPs, and, most recently, the friend.tech shares. Don’t hate the player, hate the game. It’s not the destination, it’s a means to an end.

Volatility buys founders time and users’ attention. In many ways, it’s equivalent to a customer acquisition tool. The best crypto founders use that momentum to test and ship killer products while managing the pressure and ballooning expectations. But the volatility of your own native token should not be the default assumption – there are other means to speculation that don’t destroy the long-term product-market-fit discovery (consider that Uniswap, Aave and Maker enabled speculation, but success did not explicitly require speculation in their own native token).

Conclusions

There is no one-size-fits-all approach to finding and executing great ideas. We don’t know definitively if secrets are created or found, we don’t know if your product should solve someone’s problem or “create” a problem for someone, nor can we tell if first-mover advantage is more important than late-comer advantage.

One thing is clear though – success requires progress, and progress is reached sequentially (albeit unexpectedly at times), where major discoveries precede smaller ones. Wedge is critical for finding the right users for the right product (product-market-fit); instead of throwing the widest possible net, wedge allows testing product ideas with users who care.

We’ve shown with numerous examples – both in web2 and in crypto – that the success stories that new founders aspire to all started as small, obscure ideas. Founders can’t predict the path dependency on day one; when starting out, they can’t see all the adjacent markets that lie next to each other far on the horizon. It’s the “adjacent possible” that allows businesses to identify and merge the new markets as they go along.

We’d like to see crypto founders use “wedge” as their default buzzword from now on (same as they used superapp this year). If you want to talk about it with us, feel free to reach out to the Zee Prime team.

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