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Vertical, horizontal, and ghost markets
As a founder and investor I’ve noticed a trap often enough that I gave it a name: ghost markets.
Ghost markets seem real. They have a seemingly enormous TAM and a clear story about how tech will disrupt it and create a huge company in the process. Bottom-up and top-down analyses validate the opportunity. It’s the topic du jour on Twitter and TechCrunch. So a wave of companies is funded to go after it, and then… the opportunity vanishes into thin air.
People fall for ghost markets because they misunderstand vertical and horizontal markets. So it’s worth defining those first.
Vertical markets are defined by WHO is buying, i.e., defined by the customer, and the company typically tries to do as much as possible for that one customer. Toast is a vertical company, focused on the full suite of products to run a restaurant (point-of-sale and payments, order management, online ordering, kitchen displays, etc).
Horizontal markets are defined by WHAT is being sold, i.e., defined the product, and the company tries to sell the same or a similar enough thing to as many types as possible. Calendly is a horizontal company, selling scheduling tools for a variety of industries and use cases.
The common misunderstanding comes from the subtle but critical point that no market, company, or product is entirely vertical or horizontal. Every market is defined BOTH by WHAT they sell and WHO buys it. A vertical or horizontal product is just heavily but not exclusively weighted towards one or the other.1
One way of visualizing this is with a spectrum of opportunities that contain a mix of vertical and horizontal focus. On the left are the vertical companies. They focus primarily on a specific WHO (e.g., restaurants for Toast or fitness studios for Mindbody). They also have secondary but still clear answers to the question of WHAT they sell to those people (e.g., payments, scheduling, etc). The inverse is true for the horizontal category on the right: Calendly focuses on WHAT they sell, but they can still answer the question of WHO buys it (e.g. sales reps and solopreneurs). So neither is entirely horizontal or vertical, but a mix that is primarily one or the other.
What is a ghost market?
A ghost market is a vertical market that’s too vertical or a horizontal market that’s too horizontal. It’s a market that is defined so broadly in one dimension and excludes the other dimension entirely, so that it seems large and attractive but is in fact non-existent.
I first noticed ghost markets in 2015 when I started my second company, Bonsai. We were in the “1099 space”. Flexible work seemed to have arrived, from Uber and TaskRabbit to Upwork to solo law firms and architecture practices. Publications trumpeted the “rise of the 1099 economy” and startups (including my own!) were eagerly founded and funded to help build that economy.
The problem was that the only place the “1099 space” existed was in VC pitch decks and the tax code. Yes, a very large and growing share of Americans were 1099 workers. But when you actually tried to grab a portion of the “1099 market”, it would disappear between your fingers. Each type of 1099 work involves wildly different relationships with clients, market dynamics, costs of doing work, etc. It was a seemingly attractive vertical market, but without enough of a horizontal hook, it was difficult to build a big business in. In other words, it was easy enough to answer the question of WHO we wanted to sell to—an enormous group of 1099 workers—but it was impossible to identify WHAT everyone in that group would buy.2
Another ghost market I’ve recognized recently as an investor is B2B payments. This market has the opposite problem: it has an attractive idea of WHAT to sell, but there’s no clear answer to the question of WHO would buy it. It’s a strange apparition: everyone has encountered B2B payments in some form. And the numbers are astounding: $25 trillion in payment volume in the US alone, much of it through antiquated payment rails like check and ACH. This is begging for a solution! Except my hunch is that “B2B payments,” when defined as such, doesn’t itself present a clear enough problem, or call out a distinct enough segment of customers. Who will raise their hand and say they need a solution to this problem?
Where do ghost markets come from?
I think ghost markets appear most often when someone outside the market applies a label to the customer or to the solution which is entirely accurate, but also entirely useless. The problem with ghost markets isn’t that they’re wrong; it’s that there’s no opportunity there.
Ghost markets frame the customer, need, or solution in a way that seems obvious, but is unreliable enough to undermine the startup going after them. It’s a subtle point. It’s easy to miss this when the frame is so simple, so obvious, and frequently validated by those around you.
For example, while Uber drivers, freelance designers, and solo wedding planners are technically all 1099 workers, none of them would describe themselves at that. Similarly, every business needs to accept payments and get paid, but few would identify with the need of “B2B payments”.
Another frustrating thing about ghost markets is that they reoccur. For one reason or another, they may come back into vogue every few years, receive a wave of attention and funding, and then slowly fade away.3 This is partly because ghost markets are very meme-able. I mean this in the original sense of the word, i.e., a container for an idea that spreads widely because the container is almost designed to spread and persist. When you say “1099 / freelancer market” or “B2B payments”, most people generally know what you mean, and have a sense of its immensity—but they’ll squirm when you push them for specifics.
The way founders frame their vision to their team, customers, and investors is critical. Framing can have a significant effect on what the company prioritizes and how customers and investors evaluate it.
An improper framing—such as on an opportunity in a ghost market—can lead a company off course for years before anyone realizes it. It’s critical to define the market you’re going after in a way that’s not only attractive to early hires and investors, but most importantly in a way that has a tangible answer to both WHO and WHAT.
What ghost markets have you found?
Another way of thinking about it is through the growth lens. Vertical companies grow by selling more products to the same customer segment (e.g., adding products to a suite, like Toast adding restaurant payroll and delivery products). Horizontal companies grow by selling roughly the same product to different types of buyers (e.g., Calendly selling into HR teams in addition to sales teams). The former is more product expansion, the latter is more product marketing and go-to-market expansion.
There are some exceptions to this rule, including companies that focus on the 1099 / freelance market from the only angle that matters: the tax code. Keeper (a Matrix portfolio company) is one such example that provides tax prep and filing specifically for 1099 workers.