I recently attended a talk by Peter Thiel at a conference in Mountain View. One of the things he said really resonated with me:
Peter Thiel: "When you start a company, you want to get big market share as quickly as possible, so pick a small market." #startups— Sean Oliver (@seanoliver) February 28, 2014
I think it's less about picking a small market and more about finding a way to enter a large market that no one else is looking at.
When Airbnb first launched, the concept of short-term rentals had already existed, but that market was small relative to the multibillion dollar hotel industry. Competing for the larger industry at the outset would've been difficult and expensive -- in all likelihood, a losing proposition.
Instead, they picked the smaller market and aggressively maximized their market share. As they captured share, they also captured resources and they built a winning marketplace that could compete with the big hotel chains.
There are countless examples like this. Successful companies (usually) don't jump into direct competition with huge, multi-billion dollar corporations. They compete on the fringes for the land that's not valuable enough for big companies to waste their time on. Before long, they've amassed enough of a war chest to go after the larger companies and win.
So I guess the lesson is: Pick a small market (at first).