AI is making small markets big enough - calcalistech.com

Opinion

AI is making small markets big enough

As AI lowers the cost of building and operating a company, narrow professions, local problems and overlooked niches are becoming viable businesses again, this time without venture-scale markets.

Somewhere right now, one person is building software that's only relevant to a few dozen pharmacies in a single city, and turning a profit at forty subscribers. It will never be a global platform. No venture fund will call. And for the first time, that's fine.

For the last decade, the first question anyone asked a software founder was “How big is the market?” The wrong answer killed the idea before it was built. AI is quietly retiring that question.

Part of the next AI boom will be the giants everyone is already watching. But a large part of it will be easy to miss: thousands of specialized companies built around problems once too limited, too local or too unglamorous to bother with. They won't raise venture money or chase billion-dollar markets. They'll serve a niche well and make a good living doing it.

To see why, it helps to notice that industries tend to move through the same three-stage metamorphosis. First come the pioneers: fanatics who build for the love of it, before there is any money in it. The backyard tinkerers and racing enthusiasts who showed Henry Ford there was an empire worth building. The Homebrew Computer Club hobbyists soldering machines in garages years before a PC market existed. Pioneers clear the path, but they rarely build the industry.

The industry arrives with the second stage, when the pioneers' success attracts capital. Economies of scale lower costs, educate customers and build the giants that expand the market far beyond what the pioneers imagined. It is easy to forget how many things we treat as necessities began as amusements: the automobile, the washing machine, even running water. Scale is what turned them from novelties into infrastructure.

But maturity carries the seed of a third stage. Once an industry is mainstream, production costs fall and know-how spreads, and a new generation of enthusiasts can exploit the low-cost base the giants built. The incumbents, meanwhile, become slower, and smaller operators beat them on the speed and quality possible in small batches. Niche businesses emerge again, and this third wave rarely kills the giants. The two coexist, and the edges finally get served. Industrial lagers still fill stadiums, but craft brewers reclaimed the palate. Folgers still sits on the shelf, but a generation of specialty roasters, a movement that named itself “third-wave coffee,” turned a commodity back into a craft. The same pattern has repeated across dozens of industries: automobiles, coffee, beer, music, publishing.

As most internet-based services already have their giants, and as AI drastically lowers the cost to develop, launch and maintain software, technology's own businesses are now entering that third stage. The niche was always a decent place to build a business. What's new is that it's now a decent place to build a technology company. A one-person team can build a functional product, create its marketing, analyze customer behavior and automate large parts of support and operations. The cost of reaching the first thousand customers is falling, along with the cost of building a company designed to serve only that thousand.

This creates room for a different kind of technology business: software for one profession, one workflow, one city or one overlooked regulatory problem. Picture a scheduling and compliance tool for the few thousand driving instructors in a single state, built by one founder and profitable at three hundred subscribers. It will never become a global platform, and it may never interest a venture fund. It can still become an excellent business for the person building it and a valuable product for the customers using it.

The obvious objection is that cheap tools cut both ways. If AI lets one person serve a niche, it lets a hundred others serve it too, and lets the giants reach down into markets they used to ignore. True, and it will wash out the businesses whose only edge was adopting cheap tools first. But the third wave was never won on cost. Craft brewers didn't beat Budweiser on price; they won on taste and on knowing their customer. The micro-businesses that last will be the ones that understand their thousand customers better than any platform bothers to.

Lower costs widen the range of viable ideas, but they don't change the work. Founders still need to identify a real problem, reach customers, earn trust, price correctly and handle the operational and legal work that turns an experiment into a functioning business. AI makes ideas cheaper to test and promising markets cheaper to serve. It doesn't make companies easier to run, but it hands aspiring founders a new lens: use technology to build real solutions for micro-markets that were never worth the effort before.

This is all landing at a moment when independence has become a mass aspiration. Whether driven by economic pressure or the fear of AI-led job displacement, a once-in-a-generation shift toward working for oneself is under way. More than five million new business applications are now filed in the United States every year, over 80% of them for firms that will never have a single employee. One in three American adults say they plan to start a business or a side hustle in the coming year, and surveys now rank entrepreneurship as Americans' top wealth-building strategy, ahead of saving, investing or a traditional job. New tools are meeting a new appetite.

Most of these new businesses will be traditional service businesses: the consultants, contractors and local operators who have always formed the backbone of the economy. But a growing share are software's craft brewers: small, technical shops that use the giants' own infrastructure to serve a narrow audience better than any platform built for everyone can. This is the metamorphosis completing itself, the return of the pioneer, now armed with tools that used to require a corporation. The giants aren't going anywhere, but the edges are finally worth serving. The micro-markets never grew. AI simply made them big enough to build on again.

Yali Saar is the co-founder and CEO of Tailor Brands.