Efficient Oligopoly vs Fragmented Anarchy
Notes on market structures and startup opportunities
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As an early-stage VC, evaluating market structure is crucial to assessing the viability of a startup. Some sectors naturally consolidate into efficient oligopolies, while others remain in a state of fragmented anarchy with no dominant players. In particular, SMB markets often lack equilibrium. This raises fundamental questions about where startups can build lasting moats.
Oligopolies are bad for startups, but those markets are efficient.
Let’s start with the definition. What’s an efficient oligopoly? It’s a market where a few dominant players control most of the market share. This creates economies of scale and network effects.
Examples: Cloud computing (AWS, Azure, GCP), semiconductors (Nvidia, TSMC), credit cards (Visa, Mastercard, Amex).
If it’s bad, why do they exist?
High fixed costs and economies of scale → Creates barriers to entry.
Regulatory capture and lobbying → Protects incumbents.
Network effects and switching costs → Makes competition hard.
Implications for startups:
Startups in these markets must find a 10x angle of attack e.g. OpenAI vs Google in AI. Partnering with incumbents may be a better strategy than competing directly e.g. OpenAI teaming up with Microsoft
Fragmented markets are good for startups, but it’s anarchy over there.
What’s a fragmented anarchy? This is a market with low barriers to entry, little differentiation, and no clear path to dominance.
Examples: SMB software tools, local services, direct-to-consumer brands, general consulting.
If it’s so difficult, why do they persist?
No economies of scale → Hard to centralize.
Customer acquisition is expensive → No single player can dominate profitably.
High churn and undifferentiated offerings → No sticky advantages.
Implications for startups:
Hard to build venture-scale businesses in these sectors. Many early wins get eroded by competition & margin compression. The best angles of attack involve roll-ups, aggregators, or platform strategies e.g. Toast consolidating SMB restaurants, Shopify for e-commerce.
What about SMB markets?
SMBs are too diverse → Their needs are hyper-specific, making one-size-fits-all solutions hard.
Constant churn → High business failure rates prevent stability.
Pricing pressure and cost sensitivity → SMBs are price-sensitive, reducing profit margins.
VC dilemma: Startups serving SMBs often need to either move upmarket (e.g. enterprise SaaS) or become an infrastructure layer (e.g. Stripe, Square).
Where is the opportunity for startups?
Forcing efficiency in fragmented markets
Aggregation (marketplaces, roll-ups).
Infrastructure for fragmented entities (payments, logistics, compliance).
Finding gaps in oligopolies
Where the incumbents are weak or slow to innovate.
Regulatory changes that break moats (e.g. fintech disruption in banking).
Leveraging AI to drive consolidation
AI automation in industries with high fragmentation (e.g. legal tech, healthcare, logistics).
What’s the path forward?
Understanding whether a startup is playing in an oligopoly-dominated or fragmented market determines the right path. VCs need to assess if a market is trending toward consolidation or permanent fragmentation before investing. The biggest wins come from either riding an inevitable oligopoly wave or forcing efficiency where none existed before.
If you're a founder or an investor who has been thinking about this, I'd love to hear from you.
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