From http://www.paulgraham.com/startupmistakes.html:
"3. Marginal Niche
Most of the groups that apply to Y Combinator suffer from a common problem: choosing a small, obscure niche in the hope of avoiding competition."
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Usually the problem isn't that the market is too big, it's that the company is too scattered in focus. If you know your product well and you know its target, big playing fields are not a problem. You can be a small niche player and still be all over the place in delivery.
The best way to build a company is not by going after an existing category, but by creating a new category you can be first in. In the struggle for life, no two startups can occupy the same position. If they try to do so, one company will drive the other to extinction.
Now this does not mean that you can go ahead and invent some "obscure niche". A startup that serves a market too small and of little interest may never gain the traction to reach a tipping point.
Competition is a good thing. It takes a George Foreman to make a Muhammad Ali. Strong competition validates the smaller player. I will go as far as to suggest that without Digg, Reddit would've had a difficult time gaining wide angle attention from the blogosphere. However, competition should be avoided where it makes sense. In other words, don't consciously look for it.
All business is a niche business. Startups must put a conscious focus on segmenting their market to a small but sustainable size. I have emphasized the significance of this in my earlier articles:
isn't one of the things that makes the US good for startups the fact that we have one large unified market? If you only read this post you might think it would be better to start in a European country. I guess the takeaway would be, you can turn your limitation (relatively small home market) into a strength (use your niche)
I think what makes the US a good market is that is has a large general market, which is strong because its size produces more opportunities due to bigger niches not due to sheer size and certainly not due to homogeneity.
"3. Marginal Niche
Most of the groups that apply to Y Combinator suffer from a common problem: choosing a small, obscure niche in the hope of avoiding competition."
---
Usually the problem isn't that the market is too big, it's that the company is too scattered in focus. If you know your product well and you know its target, big playing fields are not a problem. You can be a small niche player and still be all over the place in delivery.