The Draws and Drawbacks of Being in a Niche

Week 34 of Founding Typogram

As I was diving deeper into startup naming guide, I collected thousands of startup companies’ logos and domains into a notion database and started to analyze trends in them: 

Once I had all the data nicely formated, I got curious and tried to poke around and see if there were apparent patterns that I could spot or some cool startup I could learn about. The first name that showed up caught my attention: Byte Kitchen, a ghost kitchen company founded in 2021, funded by Y Combinator.

It caught my attention because I knew someone backed by Y Combinator to do the same thing (centralized ghost kitchen for resturants) three years ago. YC didn’t like their original idea but liked them as founders, so they were accepted into the accelerator but needed to pivot to a new idea. They ended up spending the time at YC working on the ghost kitchen idea, which I suspect came from YC, guessing by the two founders’ age (20-ish) and academic background (computer science student). 

So YC funded multiple ghost kitchen startups intentionally; they even went out of their way to fund founders with ideas that they don’t like and then steered their way to this space. It is not a total surprise to me — I have heard about this type of investing strategy before. It reminded me to check how many logo design or graphic design apps they have funded. A quick search yields zero results:

I covered in detail in this newsletter how we applied to Y Combinator accelerator last year but to no avail. My co-founder and I are contemplating applying again this winter with the new revenue stats. The realization that Y Combinator actively seeks out companies in another space but never invested (to be fact-checked with more detailed research) in any companies in our space worried me. Maybe we are just too small to be considered; maybe all of our efforts, carefully drafted application answers, and word-by-word video script edits are not getting enough review time because of the space we are in — it is not the hot market the investors are interested in. 

Fractal, a game NFT company founded in December 2021, already has 35 million dollars in seed funding led by a16z! That is the benefit of being in a larger and hotter market. Our company is just not cut out for that type of funding structure and growth trajectory. We are addressing a relatively cold and relatively niche market. 

Being in a small niche comes with many benefits, though, don’t get me wrong! I have been enjoying the freedom I have given myself in terms of product direction and working on the exciting things I have always wanted to work on. The fact we are not funded by investors is largely by choice — we have turned down investor meetings with the intention to avoid distraction and have never actively fundraised other than applying for one accelerator. 

Today I read the daunting email Uber CEO wrote to address their employees. The tone, the angle, and the one particular sentence, as I quote below, painted an even more daunting picture of running a VC-backed company:

As you read them, please bear in mind that while investors don’t run the company, they do own the company—and they’ve entrusted us with running it well. We get to set the strategy and make the decisions, but we need to do so in a way that ultimately serves our shareholders and their long term interests.

I didn’t start a company to work for someone else. The biggest draw of this journey is to have total control and freedom over an important part of my life — work. I don’t like the idea of being ousted from my own company, nor do I want to report to the ask of the investors when they need “free cash flow” instead of growth to deal with the economic downturn. It sometimes feels that fundraising equals interviewing one’s future boss — if you know what I mean. If I receive investment in the future, I hope I still have the freedom to run the company the way I see fit, and the way I fundraise will be centered around that requirement.

What do you think of this topic? Would you rather build product in the hot and competitive space with a larger TAM or build in a small niche space and go from there? Let me know!

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