Big fish in the small pond
It is critical for a startup to do ONE thing and do it WELL. However, the theorem of being the big fish in a small pond is not as straightforward as it seems.
First, which pond
We like ponds that haven't yet been discovered for one reason or another, or ponds that are unattractive because they are dirty or smelly.
Incumbent companies are usually very good at launching higher-quality products or services for the high end of their market - typically because they're under pressure to seek higher revenues or profitability. More often than not, these incumbent companies win the fight with a new company when it comes to the high end of the market. Consequently, incumbent companies over a period of time gravitate towards their mainstream customers and overshoot the needs of their low-end customers. This creates opportunities for new companies in the lower end of the market that is unattractive for one reason or another - low profitability or low revenues or different sales model - to the incumbents. By going after these lower ends of the market, new companies can grow and gain foothold before the incumbents take notice.
New species tend to grow and evolve in the dirty smelly ponds and not the ones with pristine water.
Going after the lower end of the market initially gives new companies a unique opportunity to get picked up by the tastemakers.