Pickleball grew 3x in 4 years to 14M players. Not by competing with tennis— but by creating a new market instead.

AI startups don’t necessarily have to beat incumbents. Some will start entirely new markets instead. 

Like Canva to Photoshop, Shopify to Amazon or Pickleball to Tennis, many of these won’t even have to compete. They create 10x easier to use products and through that open up an entirely new space. They solve problems people didn’t even know they had. In many cases they expand the market for incumbents too— pickleball didn’t steal tennis players, it became a gateway and created even more. 

We discuss the 3 factors a startup needs to be able to create a new market and why there is plenty of opportunity left in the AI space. 

Transcript

Pablo Srugo (00:00.238)
So last week we were talking a bit about competing with incumbents, especially in the age of AI. And the conclusion was that it's a lot harder to compete with incumbents now because AI, for the most part, is not really a disruptive technology. It's a radical technology, but not a disruptive one. And so to the extent that you're actually competing against incumbents, you want to look at things like, do they have market power or is it a fragmented market? You don't want to go after their main use case. And we looked at that main question, which is,

Can you get to distribution faster than incumbents can get to product? And the three questions that we looked at was one, are you going after an incumbent's main use case? Two is, are you going after a monopoly, a duopoly or a fragmented market? And the last piece was, are the incumbents that you're facing tech forward or are they tech laggards? And then somebody brought something up, which was like, what if you're creating a totally new market, right? Because those are two things that startups can do. You can go after an existing market where there's clear demand and you're trying to be better than the competition or

you can create an entirely new market. And this week I'm walking, I'm reading an article on the economist that's talking about pickleball, pickleball versus tennis. And it was interesting because it's talking about pickleball and why pickleball got so popular. And there were other things like, you know, that are specific to pickleball, like the fact that it was COVID and people were looking for new things to do. But some of the key things about pickleball actually apply to this idea of creating a new market. Pickleball is really a combination of kind of like three key ingredients. The first one is that it's 10X.

easier. It's way, way lower friction. If you think about the difference, like if you want to play tennis, you need to practice. Like you can't just go into a tennis course, grab a rack and all of a sudden start to rally, but you can with pickleball. Pickleball is 10 times easier to get started than tennis. The other thing is that pickleball has network effects because you need to play with other people. And the last thing is pickleball gets great word of mouth because frankly people play pickleball, they love it and they tell other people and those three things. In fact, I would say like, as long as you have 10 times easier, like 10 times lower friction,

You just need one of the two other things. You need to either create a great product that gets great word of mouth, or you need to have network effects. Now, if you have all three, that's a deadly combination. Now, when I'm reading the article, one of the most interesting pieces was that it talked about how even though pickleball has florist will become so big, tennis hasn't decreased. Like you would think that these two are substitutes that they're competitors, right? That in a sense, if pickleball gets more attention, that that would take people away from tennis. And actually it's the opposite. They're compliments. They both benefit. So

Pablo Srugo (02:24.43)
when demand for pickleball goes up, what it ends up doing is it actually increases demand for tennis because pickleball becomes kind of this gateway into tennis. And so in a way you can think about this, like from the context where we were talking about last week, which is what if you didn't need to figure out how to compete with incumbents? What if you didn't have to compete with incumbents at all? That's effectively what happened with pickleball. Pickleball didn't have to compete against tennis. It didn't take any market share from tennis. So it didn't have to compete. If you think about it in the world of startups, take Canva. Canva is a great example of this, right? It's a 10 times easier to use.

design platform, but because it's 10 times easier to use, it actually ends up not really going after designers for the most part. It ends up going after marketers, people that need to build things for social media. It goes after business analysts, people that need to build different things for presentations. It goes after people who aren't even users of Photoshop in the first place, because when you're 10 times easier, you tend to open up entirely new markets. And just finishing off the analogy at the end of the day,

Adobe didn't really suffer from this. Yeah, they would have loved to just own Canva and do that too. But at the end of the day, Adobe and Photoshop are doing just fine because there's still just as many, not more designers than there used to be that are professionals and that need the sort of rich tooling that only Photoshop can offer. Another great example of this is Shopify. So Shopify comes along and it makes it 10 times easier to sell things online. Amazon was already around at the time. In fact, you know, Shopify starts in 2004. Amazon IPO is in like 1997.

So it's already worth tens of billions of dollars by the time that Shopify gets started. And for a long time, Shopify was kind of misconstrued. And to an extent, it is a little bit of a competitor at Amazon, but not really in a meaningful way. I mean, Amazon is doing just fine. It's crushing e -commerce. And you could argue that what Shopify has actually done is made it easier to sell things online. And in fact, because of Shopify, there were more entrepreneurs that are selling online, that are creating stores online. And of course, a lot of those merchants, guess what? They're also selling on Amazon. But you could easily say that Shopify and Amazon are actually just as much compliments.

as they are substitutes and Shopify growing ultimately actually benefits Amazon. And that's what happens when you lower friction by so much as you end up creating in many cases an entirely new market. And the nice thing is that you end up not even having to compete. You end up not having to compete with incumbents at all. Now, to be honest, like you can't really start from this. You can't just kind of say, I want to start a new market. What new markets can I create? That's just not how these things happen. If you go back to how Toby started, he was selling snowboards online all of a sudden.

Pablo Srugo (04:48.942)
He built a really nice store and people wanted it. So he started selling it and it turned out he treated it entirely market. Now millions and millions of people use Shopify to sell things online, but you can use this kind of rubric as you have ideas, as you think through, especially because now like a lot of founders, things are moving so fast. They're trying to figure out anybody that's building an AI startup today is trying to figure out like, where are things going to go? How do I position against everything that's going on? And so I think those are really the two frameworks. And on the one hand, if you're going after existing market,

you do really need to worry about the incumbents, right? And you do need to worry about how much market power they have. You need to worry about whether you're going after some of their main use cases. You need to worry about how tech forward they are. But on the flip side, if you find a way to leverage AI to create something that is so much easier, that it opens up an entirely new market, then that's a very compelling position to be in. And by the way, like the interesting thing actually about Canva, Shopify, another one is Slack. Like Slack is another one where it creates an entirely new market. I mean, businesses before they weren't paying.

for communication tools. They were just talking in person or using email. Like that really was the two main channels. All of a sudden Slack comes along and it's able to command like $10 per month per seat. I mean, it's absolutely incredible. And again, it's those same things, right? 10 times easier to use. It's so much easier, at least at the beginning, it was so much easier to have a conversation on Slack and it has powerful network effects and great word of mouth because people loved it. They loved Slack at the beginning. But the point is none of these, you think about Canva, Shopify, Slack, of course they're all, they all have a why now. And at the end of the day, like there's some,

Meaningful tech shifts that enable it all the way from like HTML 5 when it comes to Canva you have the rise of social media that also helps the man for Canva you have like Ruby on rails that helps Shopify all these sort of things but it's not like Core driven by tech like today There's a lot of talk about these diminishing returns to the models and like and how when it comes to LLMs like the LLM revolution already happened and yeah sure It's gonna get better and it's gonna get faster any sort of things, but now it's just kind of more incremental returns That's fine. Like if you're if you're founder today

That's actually a great place to be in, because that's fine. Like, Tobii and Shopify did need some huge tech revolution for Shopify to be able to be born. By the time Canvas started in 2012, cloud computing, all these sort of things that they needed were already well in place. It's not like these technologies had just diverged. They were much more in the phase where things were just kind of getting incrementally better. They were in the phase where AI is today. But in a sense, like me as VC, I'm less curious about AI agents and like replacing humans entirely and, you know, AGI. And I'm much more curious about what new markets that we haven't even...

Pablo Srugo (07:10.67)
thought about are going to get enabled. Who is going to start spending on things that they didn't spend on before? What's the new thing that people are going to start paying for that they weren't paying for before? ChatGPT is a great example of this because now so many people are paying $20 a month for something that they never thought they needed. But in their case, obviously it was a tech driven innovation, but there's going to be so many other things again, like Slack, like Canva, like Shopify, that you didn't think that people didn't know that they needed until it was there. People didn't know they needed to be designers themselves until

Tanvo was born. People didn't think they needed to talk so much at work until Slack came around. And most people didn't know before Shopify that having an online business and being an online only merchant was even a possibility. There's going to be so many things that get built out over the next few years that open up entirely new use cases that like Pickleball did to tennis, make something so much easier that it opens up an entirely new space. If you listen to this episode and the show and you like it,

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