From yoga studios to spas, startups look to niche businesses for the next big market


niche-businessAn entrepreneur’s job is to find a problem that needs fixing. But as more and more startups get founded and funded, a growing number of them are forced to find problems in smaller, niche areas — areas that people may not think to yield large demand.

A software platform for yoga studios? For beauty shops? Tour guides? These are small businesses with small budgets. How could there possibly be enough demand?

Yet they exist, and some of them are growing rapidly. The key, it seems, is in the B2B model these companies are adopting which, by these companies’ thinking at least, can be applied to any business sector big or small.

I talked with an entrepreneur the other day who is banking on such a concept. Scott Zimmerman is the CEO of Xola, a booking and distribution platform for tour guides. It quite simply provides a way for tour guides to plan and transact all of their future bookings, instead of relying on a slew of other disaggregated tools.

Booking and scheduling softwares of this kind do exist, but are generally tailored for hotels. What’s more, their price tag (in the form of subscription and transaction fees) is often more than many small businesses even fathom. Many tour guides are simple outdoors-people who work from their home, so starting a business with an expensive software is simply out of the question. Instead, these business owners probably use poorly-made Google forms for bookings, Google Cal to store and update the schedule, and emails and phone calls for confirmation. Booking modifications and cancelations are a whole other problem.

While tour guides seem pretty niche in and of itself, Zimmerman is certain that he has tapped a large enough market to make a truly sustainable business.

According to him, what Xola’s real key to success is the fact that it attacks a problem — that is, bringing together all the guided tours on one platform — and does it on the business-facing side. He’s yet to see any real competition for apps and platforms trying to do what Xola does, beyond what he deems “patchwork solutions,” like the mixture of Google apps explained previously.

“A niche problem is a big problem if you look at the ubiquity of the problem,” he said. To give an example of this ‘ubiquitous’ factor, he points to the headaches that ensue when trying to coordinate marketing for small tour businesses and its booking. Pretty much most small tour businesses have never had access to large-scale booking softwares because they’re too expensive, and have instead relied on emails and phone calls.

Zimmerman looks to a slew of recent companies that have formed similar business models. Perhaps the most glaring example being Mindbody, the health and wellness business management software maker, which just raised $ 50 million and is expected to IPO sometime in 2015. “In 2009 there was no I way I could believe that a yoga studio software company could be a public company,” Zimmerman said.

That company, which is valued at more than $ 450 million, touts over 500,000 practitioners who use its platform and an annual revenue run rate of around $ 50 million. It taps into precisely what Zimmerman talks about: a niche market, but one where every participant has the same problems.

Another example would be Booker, which started out as a marketing system for spas but is now a more generalized business-facing services platform for companies in the service industry. It raised a $ 27.5 million Series B last year from Bain Capital.

Zimmerman says that the strategies for startups like Xola, which focus on smaller specific markets, make it easier to get their name known. Often, he says a startup “tries to do way too much… [For Xola] it’s focus focus focus.”

But how does a would-be entrepreneur know if the target market is even big enough? For Xola even its CEO will admit that the available data is fuzzy. But Zimmerman’s summation of Xola is this: “The tourism industry makes up a massive amount of the GDP of the world.” According to the WTO, tourism does make up one of the “top three exports for the majority of developing countries.”

Given that, it’s easy to say that the possibility of a large market is there, but there’s no way to know precisely how many providers are booked and which system each uses. “Who has that data?” Zimmerman asks. “Can anyone in the market tell me what the vacancy rate is for activity providers?” And, quite honestly, the chances that there was significant data about what yoga studios need for booking before Mindbody is highly unlikely.

The question now is whether other companies and investors follow suit. Given Mindbody’s lead it’s quite possible – perhaps even a trend to look out for in 2014. Xola was able to raise $ 1.8 million last month; this next year will be its big indicator.

As the tour guide-centric CEO sees it, all it boils down to is: “How big is this opportunity?” If it’s as big as he thinks, then we should be seeing more on the horizon.

[illustration by Brad Jonas for Pando]