Choosing A Market? Follow 2 Rules byMichael

How this serial entrepreneur knew June 2007 was the right time to start a company that would build social media apps for Facebook.

My wife Kass and I were focused on making babies, not companies, when we decided to start our latest venture, Buddy Media, an enterprise social software company.

It was May 2007. We had sold GOLF.com to Time Inc. 18 months earlier. All obligations to the acquirer were fulfilled. We were keeping busy investing, advising, and preparing for the birth of our third child, Vivian.

Vivi was born in the morning of May 24th. And a few hours later, Mark Zuckerberg launched the Facebook Platform, which allowed third-party developers to build applications that worked seamlessly on Facebook, distribute them through Facebook, and monetize them as they wish.

I read the news on my BlackBerry as Kass slept in the hospital bed next to me. I was blown away by the news and knew then and there that I had just conceived my next business.

Shortly after, I met serial entrepreneur Mark Pincus for a smoothie at Clay's Gym on 14th Street in NYC. Mark was also thinking about starting a Facebook-based company, which he would go on to launch as Presidio Media. His first product? A free poker Facebook application. Mark's idea turned out to be a great one. Presidio Media became Zynga, and Mark became a billionaire.

Rule #1: Picking the right market is half the battle.

Kass and I really didn't have a business model at the time. And we really didn't know much about application development (on Facebook or off)! But we knew in our gut that Facebook would be big. And many smart people around us, like Mark, agreed.

In June 2007, we decided to raise a few bucks to get going. I wrote to several friends and colleagues: "While Buddy Media will build applications for all social networks with scale, the initial focus will be on Facebook. Why? Facebook's numbers are staggering and hard to ignore, and we are taking a position that Facebook will be the long-term winner in the space."

Don't focus on the business model. Focus on the market. What matters most is getting into the right game that has the right stakes to make it worthwhile for you. Pick the right market and you can make a ton of mistakes and still make a ton of money.

If you're in the right market, success is not guaranteed. If you're in the wrong market, failure often is the only outcome.

That said, execution is a prerequisite for success, regardless of what market you operate in. But in most industries, the top five players do okay. Zynga is indeed a multi-billion dollar company. But its competitors didn't do too poorly—Playfish and PopCap Games sold to Electronic Arts for $400 million and $1.3 billion, respectively, and Disney bought Zynga competitor Playdom for $800 million. Not bad for a few years work!

Rule #2: Timing is the other half of the battle.

It's not enough just to pick a great industry. You also have to get the timing right. If you pick the right space, but you're too early, you'll get crushed.

It's actually rather easy to figure out if you're too early. The key is to talk less and listen more. If you hear a lot of buzz or chatter about a market opportunity, you're probably on to something. Is the market starting to get press attention? Are there entrepreneurs you respect going into the space? Are there other companies already doing what you want to do?

We are now four years into the global social media revolution. But new companies are starting every day that will succeed and turn the founders into multimillionaires.

Pinterest, a site you may not have even heard of yet, surpassed 10 million U.S. monthly visitors last month, which was faster than any other site in history, according to comScore. The service's main functionality lets you pin pages and content you find online to your own personal digital pin board. Not exactly a new idea.

E-commerce isn't exactly a new industry. But companies with innovative models like Gilt Groupe and One Kings Lane (started by Mark Pincus' awesome wife Alison shortly after she quit a corporate job at Hachette Filipacchi) are worth more than half a billion dollars.

If these companies launched before the market was ready, they would be out of business. Just look at online grocer Webvan, which burned through $1 billion in two years; today, most of the people I know in New York City buy groceries online.

Most entrepreneurs look at competition as a bad thing. If someone else has launched with my idea, I shouldn't move forward, right? WRONG! That's exactly when you should do it. If you're the only person going after an opportunity, chances are high that you're chasing a dead end.

The fact that Mark Zuckerberg, Peter Thiel, Howard Lindzon, Roger Ehrenberg, Brian Bedol, James Altucher, and a few others liked the Facebook ecosystem and were willing to back me in it gave me the confidence needed to jump in.

The ideal scenario is to start your business a year before a market starts to boom. In the first year, you're going to be heads down building your product, talking to potential customers, and getting your foundation built. So the fact that there isn't a market yet doesn't really matter. It's impossible to get to what they call a "product-market fit" when you don't have a product!

Given that we don't live in an ideal world, it's better to pick an industry that has already shown signs of growth versus trying to predict the future.